Merck & Co, Inc.: Big Pharma Checkup for 2014

Merck (MRK) may be turning the corner from challenges tied to losing patent protection for Singulair. Here's what you need to know about the company in 2014.

Jan 15, 2014 at 6:30PM

It's been tough sledding for Merck (NYSE:MRK) since it lost patent protection for its high profile $5 billion a year blockbuster drug Singulair in 2012. The lost sales have forced major restructuring that's included asset sales, lay-offs, and a laser focus on the company's pipeline.

However, Merck may be turning the corner. Investors thinking the worst may be behind the drug giant have helped lift shares in the past year. 

MRK Chart

MRK data by YCharts

The enthusiasm may not be misplaced.
Merck has a potential blockbuster cancer drug working its way through trials. MK-3475 is one of a new class of promising drugs, and it's currently in phase 3 clinical trials for advanced melanoma. Merck hopes to file for FDA approval this year. 

Patients treated with MK-3475 saw a marked 81% improvement in overall survival and 41% of patients in the trial saw their tumor shrink.

If those results hold up and the drug gets the go-ahead from the FDA, it will compete against Bristol-Myers Squibb's (NYSE:BMY) successful cancer drug Yervoy, which is on pace to post more than $1 billion in sales.

The market for melanoma treatment is $2.4 billion in the United States and is expected to grow to as much as $4.5 billion by 2020 as new, more pricey treatments like MK-3475 win approval. Nearly 1 million people in the United States are diagnosed with melanoma, and nearly 77,000 new cases are diagnosed each year, according to the National Cancer Institute.

Cutting to the bone
Offsetting sales lost to patent expirations means, at least in the near-term, cutting down on costs. That includes plans announced in October to cut 20% of its workforce in a bid to shave $2.5 billion in expenses. Merck expects $1 billion of those savings will show up in 2014.

The company also sold its RNAi assets to Alnylam Pharmaceuticals (NASDAQ:ALNY) this month, putting an end to investor uncertainty regarding patents that were acquired in a $1 billion purchase of Sirna Therapeutics in 2006.   

As it struggled to monetize the acquisition, Merck shuttered Sirna in 2011.  Investors my be unhappy with the $175 million sales price.  However, despite Alnylam getting what may turn out to be a bargain, Merck does walk away with $25 million in cash, $150 million in Alnylam stock, more than $100 million in potential milestones, and the chance for royalties if Alnylam is able to commercialize any drugs using Sirna's patents.

Merck is also considering other big changes, including whether to jettison its consumer health care business. That business includes everything from Claritin to Coppertone sun protection and had sales of $443 million in Q3.

Rumors have popped up recently suggesting Merck may be discussing an asset swap with Novartis (NYSE:NVS) that would include Novartis taking over Merck's OTC portfolio in exchange for Novartis' animal health and vaccines product lines. Sales of Novartis' animal health business total roughly $1 billion a year and sales of Novartis vaccines reached $594 million in the third quarter.

But the changes have so far done little to encourage analysts who have cut their earnings outlook for Merck from $3.56 to $3.48 over the past 90 days. That drop-off is likely due to worries over the loss of patent protection for Merck's cancer drug Temodar, which had $900 million in sales last year. 

Focusing investors on the areas for growth
During Merck's presentation at the recent JP Morgan Healthcare Conference in January, a lot of attention focused on growing areas of Merck's business, including vaccines, immunology, emerging markets, and diabetes.

The fastest growing of those four has been vaccines, with sales growing 15% year-to-date through September from 2012. That lift has come in large part thanks to higher sales of Gardasil, which produced revenue of $1.4 billion in the first three quarters of 2013, up from $1.2 billion a year ago.

Immunology has also been a strong performer, with sales up 12% during the same period thanks to Remicade. Remicade's sales totaled $1.6 billion in the first nine months of 2013, up from $1.5 billion in the comparable period of 2012.

MK-5172/MK-8742, a two drug combo treatment for hepatitis C that is in phase 2b, and MK-8931 in phase 3 trials for Alzheimer's disease potentially support future growth.

Fool-worthy final thoughts
Bristol charges $110,000 for Yervoy That suggests MK-3475, which Merck is studying in 10 trials across 10 different cancers, could be priced similarly. But Bristol isn't going to just hand over its market share for the indication. It's advancing its own PD-1 drug, nivolumab, through more than 25 studies too.

However, given Merck is trading at just 15 times forward earnings estimates -- below where shares have been valued over the past five years and less than Bristol's valuation -- there may be an opportunity in Merck for investors, particularly if the company can over-execute on its plans this year.

One more company that could make a big impact in 2014
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC.  E.B. Capital's clients may or may not have positions in the companies mentioned.  Todd also owns Gundalow Advisor's, LLC.  Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers