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Is Merck's Type 2 Diabetes Blockbuster in Trouble?

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For the last several years, Merck (NYSE: MRK  ) has been able to ride the success of its leading type 2 diabetes franchise Januvia/Janumet, which generated $5.75 billion in sales last year and represented more than 14% of total pharmaceutical revenue. The successful franchise has taken the top spot from Singulair in the titan's product lineup and will continue to anchor the company for the foreseeable future. In fact, after Januvia and Janumet, only three products have shots at eclipsing $2 billion in sales in 2013.

This will be a tough year for Merck as Singulair experiences its first full year of generic competition in the United States and loses exclusivity in major European markets. The company is relying heavily on its type 2 diabetes drug franchise to offset as much stagnation as possible. While growth is expected, there is a wave of next generation competition that is about to hit the diabetes market. Couple that with new safety concerns for patients taking DPP-4 inhibitors and GLP-1 agonists and things could get messy. Are Merck and Januvia in trouble?  

A big-picture view
Understanding the big picture is important to understanding how Januvia's vulnerability affects Merck. The company has taken a lot of heat in recent years for its expensive R&D program, which has swallowed almost $28 billion total and represents 19.6% of total revenue over the last three years alone. That means little without comparing it to competitors' ratios, but investors and analysts can agree that returns have been lacking for such a massive budget.  

Merck does have bright spots in its product lineup such as Januvia, Gardasil, Zetia, and Isentress. Unfortunately, it also has a series of delays and gaffes in its pipeline. The company had a Food and Drug Administration, or FDA, decision on its next generation anesthesia reversal agent Suggamadex delayed until the second half of 2013. Some analysts expect an eventual U.S. launch to double annual sales to $575 million by 2016, but with several regulatory delays since 2008 some question if it will ever get the nod.  

Internal delays have also hit osteoporosis drug odanacatib, which analysts penciled in for $2 billion in peak annual sales. The series of hiccups forced Merck to can R&D chief Peter Kim for former Amgen chief Roger Perlmutter. It will take time to cut the fat off the company’s R&D program, but hopefully Perlmutter can revitalize and refocus the pipeline.

Hearing footsteps
As you can see, Merck has a lot riding on Januvia's continued success. The drug has yet to falter in any major way and is generally accepted as one of the safest therapies for patients with type 2 diabetes. That could change with a recently concluded study -- the first of its kind -- linking the drug and Bristol Meyers Squibb's (NYSE: BMY  ) Byetta to a doubling in pancreatitis cases. The FDA has had past concerns with the two drugs, which increase levels of the hormone (GLP-1) responsible for insulin production.

It's still too early to project how doctors will change their prescriptions to patients in light of the new data, but the competition isn't making the decision any easier. Johnson & Johnson (NYSE: JNJ  ) is hoping to gain approval for its first-in-class SGLT-2 type 2 diabetes drug. Not only did the therapy beat Januvia in lowering glucose levels and weight loss (not an endpoint, but a welcomed feature for patients nonetheless), but it is not expected to increase pancreatitis risks. A fast start for the projected blockbuster will put Merck on edge.

Future competition may come from Forxiga, another drug in the SGLT-2 class, from Bristol and AstraZeneca. The FDA gave the new therapy a thumbs-down over cancer concerns, but the agency is going to reconsider it later this year. And as fellow Fool Sean Williams pointed out not too long ago, an even newer class of type 2 diabetes drugs may have a promising future: glucokinase activators, such as AMG 151 from Amgen (NASDAQ: AMGN  ) and Array Biopharma (NASDAQ: ARRY  ) . The experimental drug is still a few years away from hitting the market, but has shown promise in quickly reaching maximum efficiency in patients.

Foolish bottom line
What does it all mean for Merck? The new safety data are not a good sign. Usually skeptical about assigning new drugs as first-line treatments, physicians may be inclined to turn to Invokana for patients at higher risk of developing pancreatitis from Januvia. It is still too early to tell how -- or even if -- Januvia's growth will be affected, but it is something investors will want to pay close attention to for the next several quarters.

Can Merck continue to lean on Januvia?
This titan of the pharmaceutical industry stumbled into 2013 and continues to battle patent expirations and pipeline problems.  Now, the company's leading drug franchise faces increased market pressure. Is Merck still a solid dividend play, or should investors be looking elsewhere? In a new premium research report on Merck, The Fool tackles all of the company's moving parts, its major market opportunities, and reasons to both buy and sell. To find out more click here to claim your copy today.

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