Germany-based pharma giant Merck (MRK 0.44%) is bracing itself for a sales decline this year and was just hit by some bad news: The company expects its COVID-19 treatment Lagevrio sales to be less than 20% of what they were in 2022. But Merck's pipeline strength suggests that investors might want to think twice before dumping their shares in the pharmaceutical company.
Let's see why.
The bad news overshadowed a strong performance
Merck reported worldwide sales of $59.3 billion in 2022, up 22%, and earnings per share (EPS) under generally accepted accounting principles (GAAP) of $5.71, up 17.5% from $4.86 in 2021. Considerable credit for this expansion goes to Merck's COVID-19 treatment, Lagevrio, for which the company released some bad news on Tuesday (Feb. 21). The drug, also known by the generic name molnupiravir, did not reach the primary endpoint (goal) in a phase 3 clinical trial among participants who did not have COVID-19 but lived with someone else who was recently diagnosed with it. That is, the drug didn't reduce the risk of the participants catching the pandemic disease, at least not in a statistically significant way.
In a busy news day, Merck also said it had signed a memorandum of understanding to export certain drugs to China, and that it will present positive results from two other clinical trials at an American College of Cardiology conference next week: a pivotal phase 3 study of sotatercept, intended as an add-on to stable background therapy to treat pulmonary arterial hypertension (a type of high blood pressure that affects the arteries in the right side of the heart and the lungs), and a phase 2b trial of MK-0616, intended to treat hypercholesterolemia (a disorder in which the body's low-density lipoprotein (LDL), or bad cholesterol, is too high).
Cancer treatments are key to future growth
News like the study results is especially significant for a pharmaceutical major like Merck, which depends on its all-important pipeline of new drugs for continued growth. Last year, according to the company's review, its pipeline was strengthened not so much through its own efforts as "through strategic business development, including acquisition of Imago and key agreements with Moderna, Orna, Orion and Kelun-Biotech."
The acquisition of Imago BioSciences, which Merck completed in January for a total equity value of $1.35 billion, brings a portfolio of treatments in development for blood disorders such as essential thrombocythemia, myelofibrosis, and polycythemia vera (the latter two are types of cancer).
In a December agreement with Chinese company Kelun-Biotech, Merck paid $175 million upfront and agreed to pay up to $9.3 billion down the road to develop seven potential cancer treatments called antibody-drug conjugates that have only ever been tested in animals. Merck announced last October that it is paying $250 million to exercise its option with Moderna to jointly develop and commercialize a "personalized cancer vaccine" intended as an adjuvant treatment for certain high-risk types of melanoma. Under the agreement with Orna Therapeutics announced last August, Merck is making an initial payment of $150 million and may pay up to $3.5 billion, to help develop RNA vaccines and therapeutics for infectious diseases and cancers. And in a deal with Orion Corp. announced in July, Merck paid $290 million in advance to help develop a treatment for metastatic castration-resistant prostate cancer, which is now in a phase 2 clinical trial.
Sales hit expected this year from Lagevrio
Back on Merck's home front, last year's sales of Lagevrio and a boost from foreign currency rates accounted for nearly half of its sales growth, but without these factors, the increase was still a strong 12% year over year. Additionally, sales of the company's human papillomavirus vaccine, Gardasil, increased 22% over the year, to $6.9 billion.
However, this year Merck expects its sales to fall, coming out to between $57.2 billion and $58.7 billion. This dip is due in part to the negative impact of the two factors that helped it most last year, foreign currency exchange rates and sales of Lagevrio, which are expected to fall to $1 billion from the 2022 figure of almost $5.7 billion.
Additionally, the company faces litigation along with Glenmark Pharmaceuticals on claims they conspired to suppress generic competition for Merck's blockbuster cholesterol drug Zetia. MRK shares have varied within a fairly narrow band, from just below $103 to a little less than $115, since the end of November. But given the company's generally stable position and massive investment in promising cancer therapies, investors with patience might want to think about digging in until shares resume their upward march.
