Earnings Round-up: Here's How Merck & Co Is Weathering Its Storm

Merck & Co (NYSE: MRK  ) hasn't had an easy go of it. Over the past few years, it's lost billions in sales as blockbuster drugs including Singulair have lost patent protection. 

As those sales have eroded, Merck has been slow to replace them. Out of Merck's mature line-up of top-selling drugs, only one saw its sales grow 10% or more year over year in the first quarter.

Despite the patent headwinds and the lack of new, fast-growing products, investors have been bidding Merck's shares higher this past month on optimism that the company is turning the corner. Given the recent move higher, let's take a closer look at the company's first-quarter results.

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Navigating headwinds, and a mature product line
Merck's pharmaceutical sales fell 5% to $8.4 billion in the past year, as generics won business away from Merck's top selling Nasonex, which saw its sales fall 19% to $312 million, and Singulair, which saw its sales fall 20% to $271 million.

Offsetting some of that drop were Januvia, Merck's top-selling diabetes treatment, Remicade, a treatment for autoimmune disease including rheumatoid arthritis, and Isentress, an HIV therapy. 

Januvia remains Merck's top seller. It's the company's only diabetes drug, yet its widespread use means Merck's market share of diabetes drug spending trails only Novo Nordisk and Sanofi.

Januvia's sales improved 3% from a year ago to $1.3 billion in the first quarter; however, the growth came from price hikes rather than prescription volume. The company has patent protection on Januvia until 2022, so the drug has plenty of runway to keep propping up Merck's results.

Remicade was the only one of Merck's top sellers to post double-digit year-over-year percentage growth in the first quarter.

The drug, which is co-marketed with Johnson & Johnson (NYSE: JNJ  ) , generated $600 million in sales for Merck last quarter and produced more than $6 billion in sales for Merck and Johnson in 2013.

That's impressive growth for a mature, blockbuster drug; however, Remicade could face new pressure from generic biosimilars soon.

Hospira  (NYSE: HSP  ) launched a Remicade biosimilar in Central and Easter European markets during the first quarter, and Hospira hopes to launch its variation of the drug more widely in Europe when Remicade's EU patent expires next year. If so, Merck and Johnson could suffer a significant hit to Remicade's sales by the end of 2015.

Isentress was also a solid performer for Merck in the quarter. Isentress' sales grew 8% to nearly $400 million in the first quarter. And although payers have pushed back on Isentress' high price -- the drug's suggested wholesale price is roughly $14,735 per year -- it has become a go-to, first-line HIV treatment. That's good news for Merck given it maintains patent protection on the drug until 2022. 

Advancing to market
Faced with an absence of fast-growing drugs and a potential threat to Remicade, the pressure is high for Merck to launch new drugs.

Fortunately, Merck's pipeline is maturing, and new drugs are heading to the FDA for review. For example, the FDA approved two new Merck allergy medications last month.

One of them is Grastek, a treatment for common grass allergies. The other is Ragwitek, which got the FDA nod a few weeks later as a treatment for ragweed allergies. Both of these drugs are oral alternatives to inconvenient allergy shots and could begin contributing to sales as early as the second quarter.

Merck also has vintafolide up for conditional approval in Europe. The drug, which was co-developed by Endocyte, could get the nod from EU regulators this year. In March, a key advisory panel recommended approving the drug. Since decisions often follow panel recommendations, a vintafolide approval should be on the way.

Merck is also awaiting an FDA decision on vorapaxar, a drug for thrombosis. Vorapaxar could win approval as a treatment for patients who have had a previous heart attack, but because of bleeding risks, would not be eligible for use in patients who have previously had a stroke.

Ultimately, that bleeding profile may limit the drug's appeal, but the FDA's advisory panel voted 10 to 1 in favor of approving the drug in January. A final FDA decision on vorapaxar is expected in the next two months.

Further down the pipeline
Merck is also developing a hepatitis C treatment that posted solid results in mid-stage trials; however, it will compete in an increasingly competitive market dominated by Gilead's Sovaldi. Sovaldi, which won FDA approval in December, posted sales of more than $2 billion in the first quarter.

Merck will also have to vie for market share with AbbVie and Bristol-Myers, both of which have already filed new hepatitis C drugs for approval. On the plus side, Merck's two-drug combination matches up nicely with competitors, clearing viral load in 98% of genotype 1 patients during mid-stage trials.

In addition to its hepatitis C therapy, Merck may also have an intriguing cancer treatment in MK-3475, a PD-1 inhibiting drug that is designed to take the brakes off the body's immune system.

Merck has 13 ongoing trials studying MK-3475 across more than 30 types of cancer, and it plans to file a rolling submission for the drug as a treatment for advanced melanoma soon.

Fool-worthy final thoughts
There's little question that challenges remain for the big pharma giant, but investors appear willing to look beyond those risks to the opportunity for the company to return to growth.

Given the company is potentially close to selling its consumer care business for potentially even more than $10 billion, the company's already sitting on $15 billion in cash, and generating $2.5 billion in quarterly free cash flow, there's plenty of shareholder friendly powder to spend. Last year alone, Merck returned $12 billion to investors, and that's something investors can get excited about.

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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8/31/2015 4:03 PM
MRK $53.85 Down -1.52 -2.75%
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