The Outlook For Merck’s Diabetes Drug Business

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Diabetes drugs are important to Merck (NYSE:MRK) and constitute nearly 15% of its value, according to our estimates. Most of this value can be attributed to Januvia and Janumet, with the rest coming from the phase 3 pipeline. Our analysis indicates that Merck’s diabetes franchise will remain strong through 2022, at which point competitive pressure will likely outweigh the incremental growth from new drugs expected to be launched in the coming years.

So does this put Merck at a significant disadvantage? We don’t believe so, considering that its main rival J&J will see its patent on Invokana expire by 2024, and some of the other big firms such as Pfizer, Roche and Bristol-Myers Squibb are not particularly strong in the diabetes market. Additionally, the potential advancement of drugs from phase 1 and phase 2 could offset the value loss from the patent expirations of Januvia and Janumet. Below we take a look at what will drive the sales trajectory of Merck’s diabetes franchise in the next five years.

Our price estimate of $67 for Merck is slightly above the market.

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Januvia & Janumet Are Growing, But May Top Out Soon

Global sales of Januvia, Merck’s inhibitor for the treatment of type 2 diabetes, increased from $2.39 billion in 2010 to $3.91 billion in 2016. The growth was visible across the U.S., Europe and Japan. While we believe that the Januvia franchise will remain strong, the recent weakness is a cause of concern. Januvia’s growth has flattened in recent years, largely due to competition from J&J’s Invokana in the U.S. and currency movements. Overall we believe that incremental growth will become difficult, but the drug should manage to sustain its annual sales in the coming years.

Worldwide sales of Janumet stood at nearly $2.21 billion in 2016 compared to $954 million in 2010. We expect the drug’s annual sales to peak at around $2.37 billion. The incidence of diabetes has been growing globally. According to the International Diabetes Foundation, there were over 400 million people living with diabetes in 2015. This figure is expected to reach 640 million by 2040.

Phase 3 Pipeline Could Help Drive Growth

Merck currently has two new compounds in its phase 3 pipeline as far as its alimentary and metabolism business is concerned –  Ertugliflozin and MK-1293. Ertugliflozin is an SGLT2 inhibitor being evaluated for the treatment of type 2 diabetes. This is the same class of drugs to which J&J’s Invokana belongs. It is being developed in collaboration with Pfizer. MK-1293 has already been filed for EU review, and is aimed at treating type 1 and type 2 diabetes. We estimate combined peak sales of these drugs at around $2.7 billion, with nearly 65% of it achievable by the end of our forecast period.

Competitive Concerns

We expect generic versions of Januvia and Janumet to hit the market by 2022, thus affecting their sales for that year and beyond. Also, Januvia and Janumet belong to a class of drugs called DPP-4 inhibitors, and face competition from a new class of drugs called SGLT2 inhibitors. One such example is J&J’s Invokana, which put pressure on Januvia’s growth and took away some market share.

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