Merck (NYSE:MRK), like many of its Big Pharma brethren, is angling to find ways to grow following an extended period of patent expirations sapping its ability to expand its top-line. Merck has done a good job by bringing cancer immunotherapy Keytruda to market -- it'll likely surpass $1 billion in annual sales in 2016 -- and acquiring businesses that complement its core therapeutic focuses. The addition of Cubist Pharmaceuticals, for example, provides an immediate boost to Merck's acute hospital care business, and more importantly adds to its bottom-line.
But Merck remains perilously tied to the success of lead drug Januvia, a DPP-4 inhibitor that's among the most popular type 2 diabetes treatments. Overall, Januvia (which is also known as Janumet in overseas markets) brought in $1.41 billion in sales in the first quarter, putting it once again on track to generate roughly $6 billion in annual sales. Januvia regularly comprises about $1 of every $6 Merck generates from pharmaceutical product sales, and is, needless to say, critical to Merck's success.
New competition arises
Yet Januvia has faced challenges recently in the form of next-generation competition: SGLT-2 inhibitors. Instead of using DPP-4 inhibitors to increase incretin levels in the pancreas and inhibit the release of glucagon in the liver, SGLT-2 inhibitors work in the kidneys by blocking glucose absorption. Excess glucose is then excreted by the patients through their urine, thus maintaining glycemic balance.
But it's not just that SGLT-2 inhibitors have a different mechanism. They've also delivered favorable secondary results during clinical studies. For example, SGLT-2 inhibitors have been shown to induce weight loss in patients, which isn't a bad thing considering that more often than not type 2 diabetics tend to be overweight. SGLT-2 inhibitors were also shown to lower systolic blood pressure.
Arguably the greatest distinction came last summer when Eli Lilly (NYSE:LLY) and development partner Boehringer Ingelheim reported that their SGLT-2 inhibitor, Jardiance, had provided a statistically superior risk of death reduction of 32% in a long-term cardiovascular outcomes study compared to the placebo. Comparatively, Januvia did not show a statistical advantage in its long-term cardiovascular outcome trial. Johnson & Johnson's (NYSE:JNJ) Invokana is set to deliver its long-term cardiovascular outcomes trial results later this year, and AstraZeneca's (NASDAQ:AZN) Farxiga/Forxiga will do the same by 2019. It's been postulated that this improvement in cardiovascular outlook is a class effect, but Johnson & Johnson's results later this year with Invokana will go a long way towards testing this hypothesis.
Throughout the release of these new medications and the reveal of Eli Lilly's and Boehringer's data, Merck's management has suggested that DPP-4s like Januvia and SGLT-2s would be complementary and not competitive therapies. This could turn out to be wrong.
Done playing NICE
Last week, the National Institute for Health and Care Excellence, or NICE as it's known, published its final recommendation guidelines for patients with type 2 diabetes. NICE is the U.K.'s version of the Food and Drug Administration in the United States.
According to the recommendations, type 2 diabetics who are unable to take metformin, Actos, or sulfonylureas are recommended to consider either Johnson & Johnson's Invokana, Eli Lilly's and Boehringer Ingelheim's Jardiance, or AstraZeneca's Forxiga. In other words, NICE catapulted SGLT-2 inhibitors into a front-line recommendation in treating type 2 diabetes, placing them on par with DPP-4 inhibitors like Januvia and AstraZeneca's Onglyza. One way to view this recommendation is that DPP-4s could be on their way out in the U.K.
Here's what Professor Carole Longson, director of the NICE Centre for Health Technology Evaluation had to say:
"For many people whose blood glucose levels aren't controlled by diet and exercise alone, metformin is the first drug treatment that they'll be offered. But some people may experience nausea and diarrhea, and they may not be able to take it if they have kidney damage. For people who can't take a sulfonylurea or pioglitazone, then the three drugs recommended in this guidance can be considered. This is as an alternative to the separate group of drugs called dipeptidyl peptidase-4 (DPP-4) inhibitors.
The committee agreed that people with diabetes and their clinicians would value having an additional treatment option to help manage their type 2 diabetes -- which this positive guidance provides."
Is this the end of the road for Januvia?
Does this mean the end of Januvia as we know it? Not necessarily -- NICE represents the regulatory body for just a single country, the U.K. Remember, even though the European Union has the European Medicines Agency to act as its regulatory power for approving or rejecting drugs, it's up to each individual country to establish the parameters by which therapies are reimbursed and sold. Thus, what NICE has recommended does not necessarily mean France or Germany is going to change its tune on type 2 diabetes therapies.
However, it does inject a major dose of reality into the veins of Merck's shareholders. Januvia is now a mature therapy, and in spite of its dominant market share among DPP-4s and its strong pricing power as a result of its market share, a superior treatment option may exist. The only thing potentially holding SGLT-2s back from taking charge is 1) the confirmation from J&J's Invokana that SGLT-2s have a positive cardiovascular effect, and 2) that SGLT-2 inhibitors pose no long-term health threats. If you recall, a few rare cases of ketoacidosis have been reported with SGLT-2 use that the FDA is looking into. However, those cases don't appear threatening to the possible future dominance of this drug class.
Though Januvia's $6 billion in annual sales would not be expected to disappear overnight, a slow and steady retracement in sales seems quite possible -- and that's a scary scenario for Merck, which has only recently managed to reignite its organic growth. Investors who've considered buying into Merck, or who currently own shares of the U.S. drug giant, need to be aware that its largest product portfolio contributor may be running out of time, and they'll want to adjust their investment expectations accordingly.