5 Things Merck & Co., Inc.'s Management Wants You to Know

Merck (NYSE: MRK  ) may be a global pharmaceutical powerhouse with a diverse product pipeline, but even it's been a victim of the patent cliff in recent years.

In its second-quarter earnings results, released just two weeks ago, Merck reported a 1% decline in worldwide sales to $10.9 billion from the year-ago period, weighed-down by patent expirations and increasing competition, as its adjusted earnings per share inched higher by $0.01 to $0.85. If not for the company's share repurchases EPS would have fallen since net income actually dipped slightly year-over-year. 

But there's more to these figures than meets the eye, and who better to tell that story than Merck's management team?

Let's take a closer look at five of the most important quotes from Merck's conference call that every current and prospective investor should be aware of (quotes provided courtesy of S&P Capital IQ).

What Merck plans to do with its cash

"[W]e are going to use the proceeds from the Bayer transaction to augment our pipeline.... We've delivered on that commitment by agreeing to acquire Idenix for $3.85 billion and we expect to deploy a significant amount of the after tax proceeds to repurchase shares this year." – Rob Davis, Chief Financial Officer

Faced with a patent cliff, Merck isn't going to idly sit by and watch its core drug sales evaporate. Merck has a number of strategies aimed at shoring up shareholder value and reigniting growth, and this past quarter saw a number of these strategies take shape.

First, Merck sold its consumer care division, which includes over-the-counter brand names like Claritin, Coppertone, and Dr. Scholl's, to Bayer for $14.2 billion. Merck plans to put that cash to work in areas like research and development as well as deal-making. It also demonstrates to investors that Merck's focus is on drug innovation. During the call, Merck again announced its intent to use some of the proceeds from the Bayer deal to repurchase some of its own common stock.

During the quarter Merck also announced the $3.85 billion purchase of Idenix Pharmaceuticals, a developer of preclinical, early, and midstage nucleotide-based hepatitis C therapies. Merck believes that Idenix's HCV-focused portfolio could be wildly successful as either single-agent or combo therapies.

And what it won't be doing

"Merck is not interested in pursuing a business development deal either solely or primarily for the specific purpose of tax inversion.... We continue to look for value added bolt on opportunity to augment our pipeline like Idenix." – Ken Frazier, Chairman and CEO

What Merck won't be doing with its cash is seeking to make a mammoth overseas acquisition like AbbVie recently did with the purchase of Irish drugmaker Shire. Merck has no interest in a tax inversion deal, nor does it have any interest in making large purchases.

Just in case you forgot, Januvia/Janumet really is that important

Merck's strategy could best be described as seeking "bolt-on" investments which augment its own pipeline and product portfolio. The Idenix purchase, for instance, gives Merck the option to combine some of Idenix's experimental nucleotide HCV therapies with its own HCV combo (MK-5172 and MK-8742) as well as move forward with Idenix's portfolio as single-agent therapies. Merck will continue to look for these smaller value-added deals and collaboration to offset its own patent woes, but don't expect any major merger announcements anytime soon.

"When you look at the strength of our franchise [Januvia/Janumet] we have maintained about 65% share globally and about a 75% share of the class in the U.S." – Adam Schechter, President of Global Human Health

Lest you forget, type 2 diabetes drug Januvia (known as Janumet in Europe) remains a key drug for Merck, bringing in $2.91 billion in the first half of 2014.  

What's truly remarkable about these sales figures is just how dominant Januvia/Janumet is with regard to other DPP-4 inhibitors, a dominance that is both attractive and potentially dangerous.

The attractive aspect comes from being the go-to choice among physicians. As the global population grows and medical care becomes more accessible globally Merck is likely to see total prescription volume grow.

The danger, of course, is that having such a large share of revenue tied up in Januvia/Janumet could expose the company to unwelcome volatility. For example, foreign countries implementing pricing controls, such as the price reduction witnessed in Japan beginning in April of this year, could have a decisively negative impact on Januvia/Janumet sales.

A huge opportunity in Merck's future

"We've adopted the approach of looking as closely as possible at pembrolizumab monotherapy, because my view is that we need to understand how well pembrolizumab works as monotherapy before we can put into context how combinations might work.... I don't doubt the combinations will be used, that's what happens in cancer therapy, the question is which ones." – Ken Frazier

Pembrolizumab has already been submitted to the FDA for a potential accelerated approval, and Merck is anticipating a decision on or before Oct. 28. The above statement from CEO Ken Frazier, along with commentary from Roger Perlmutter, the head of Merck Research Labs, demonstrates that Merck is still just scratching the surface in terms of pembro's potential

Currently, pembro is being tested in more than 30 different malignancies. The truth is Merck simply doesn't know the full scope of how well this anti-PD-1 therapy will work against other cancers, or whether it's best dosed as a single agent or as a combination therapy. Frazier's comments seem to suggest that combination therapies are almost certain to arise (assuming approval of the drug), but that there could (excuse the pun) be a lot of trial and error along the way to discovering which combinations are optimal.

Perlmutter also noted that Merck has "submitted numerous abstracts for the European Society for Medical Oncology meeting in September," so get ready to learn more about this exciting drug.

A market big enough for Merck

"When you have 3 million [HCV] patients and you've got 90,000 to 100,000 go through the year, it tells you you're going to have a market for quite some time." – Ken Frazier

Finally, Merck's management attempts to calm investors' worries about Gilead Sciences' game-changing HCV drug Sovaldi beating everyone to market.

The important takeaway from Frazier's commentary is that the U.S., and even global hep-C market, is large enough that it could enter with its combo or some combination of HCV therapies in a couple of years and still have a large audience to treat. Long story short, the hepatitis C story is still in the early innings, and Merck anticipates playing a large role in the solution.

If you think pembrolizumab offers a lot of potential, then the opportunity afforded by this new technology could cause your jaw to hit the floor! 
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