Potential, No Bones About It

Give me a break!

Merck (NYSE: MRK  ) announces that an independent Data Monitoring Committee recommended ending Merck's phase 3 trial of odanacatib in osteoporosis patients, and shares go up 4%. That's a lot of added value for a company with a market cap of $130 billion.

Granted, the DMC ended the trial early for efficacy reasons. When it's clear that a drug candidate is working better than the comparator, it becomes no longer ethical to continue the trial and keep patients on an inferior treatment.

What was that inferior treatment that odanacatib beat? Placebo. Sugar pills. Nothing. Nada.

The threshold for ending a trial early is higher than it would be to call a drug successful at the end of the trial, so it's safe to assume that odanacatib is considerably better than placebo. But without the data, which hasn't been released yet, there's no way to know how well the drug performed.

If odanacatib would be the first osteoporosis drug on the market, it would be easy to understand investors' enthusiasm. Trial ended early, Food and Drug Administration approval a near certainty; add the future sales to your DCF model, valuation increases.

But odanacatib would enter a very crowded osteoporosis market. GlaxoSmithKline (NYSE: GSK  ) and Roche's Boniva, Warner Chilcott's (Nasdaq: WCRX  ) Actonel, and Eli Lilly's (NYSE: LLY  ) Forteo and Evista are all used to prevent bone breaks. And Merck would have to compete with cheap generics of its very popular osteoporosis drug Fosamax. Merck managed to hit $3 billion in annual sales of Fosamax before the patent expired; it won't be so easy to reach that level with odanacatib.

Example No. 1: Amgen's (Nasdaq: AMGN  ) Prolia was approved in mid-2010 and the osteoporosis drug managed sales of $88 million in the first quarter. That's certainly a respectable run rate, but Amgen isn't exactly on target for blockbuster sales in its second full year on the market.

Maybe I'm being overly cautious. Perhaps odanacatib, with the convenience of once-weekly dosing and its novel mechanism will end up being a wonder drug that competes well against the established players. I just think investors should bone up on a little more data before penciling in potential sales.

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Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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