Here’s What Will Drive Merck’s Near Term Revenue Growth

Merck (NYSE:MRK) generates its revenues from its Oncology, Cardiovascular, Anti-Infective, Alimentary & Metabolism, Respiratory, Contraceptives drugs, along with its Mature Drugs & Other Segments. Anti-Infective and Mature Drugs & Other Segments, each account for roughly a quarter of the company’s overall revenues. However, the company’s future growth can largely be linked to its Oncology segment, which has seen rapid growth in the recent past, led by the success of Keytruda. We have created an interactive dashboard ~ What Are Merck’s Key Sources of Revenue. You can adjust the revenue and margin drivers to see the impact on the company’s overall revenues, earnings, and price estimate.

Expect Mature Drugs & Other Segment To See Steady Growth In The Near Term

Merck’s Anti-Infective portfolio consists of over a dozen drugs, including Isentress, Proquad, Zepatier, and Gardasil. The segment revenues have grown in mid single digits over the past few years, primarily led by growth in Zepatier, Gardasil, Proquad, and Cubicin. However, Cubicin revenues have fallen significantly after its patent expiry, and Zepatier is also seeing sales decline. In fact, Zepatier sales plunged by over 70% in H1 2018, due to lower patient volume and increased competition. As such, Gardasil and Proquad are among a handful of drugs, which are expected to see some growth in the coming years, and offset some of the decline from Zepatier and other drugs. We forecast a high single digit revenue decline in 2018, and mid-single digit in 2019 for Merck’s Anti-Infective segment.

Looking at Mature Drugs & Others segment, the revenues on average have declined in mid-single digits over the last few years, but stabilized in the recent years. The decline can be attributed to competition from generics, and Merck’s sale of the consumer division, among other factors. However, the company is seeing steady growth in its Animal Health business of late, and this should aid the segment revenue growth in the near term. In addition, alliance revenues for Lynparza, and Lenvima should aid the the near term growth. Lenvima recently received the U.S. FDA approval for first-line treatment of unresectable hepatocellular carcinoma (HCC). The company will also promote the drug outside the U.S., and these factors will boost the alliance revenues.

Alimentary & Metabolism Revenues Have Likely Peaked

Alimentary & Metabolism drugs account for around 15% of the company’s revenues. The key drugs in this segment are Januvia and Janumet. We don’t expect any significant growth for both these drugs in the near term, and believe that the sales have likely peaked. The patent exclusivity for these drugs expire in 2022, and the combined revenues will likely be in the range of $5.5 -$6.0 billion in the near term. However, in the long run, we expect the segment revenues to decline after patent expiration, as the drugs will face biosimilar competition. Apart from these two drugs, Merck has developed a new drug Ertugliflozin, which will likely aid the segment revenue growth in the coming years, and offset some of the declines from Januvia and Janumet.

Oncology Remains The Key Growth Driver For Merck

The Oncology segment accounted for roughly 12% of Merck’s total revenues in 2017, and we expect the contribution to be much higher at around 20% by the end of our forecast period. Oncology has seen rapid growth in the recent years, led by its blockbuster drug Keytruda. The drug sales increased from $500 million in 2015 to $3.8 billion in 2017. Further, it generated sales of over $3 billion in the first half of 2018. This can be attributed to its wide scope with approvals for 12 indications. Keytruda has a large addressable market because of its approval for lung cancer. The company is currently working on 9 programs in different therapeutic areas, such as Head & Neck, Liver, and Gastric, in its phase 3 trials for Keytruda. Some of these will likely see regulatory approvals, and aid the sales growth in the coming years. Note that the drug’s peak sales are touted to be as high as $16 billion while we estimate it to be around $7.5 billion over the next few years.

The company’s other segments include Respiratory, Contraceptives, Cardiovascular, and Musculoskeletal, which combined accounts for around 20% of the company’s overall revenues.

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