Merck (NYSE:MRK)'s drug suvorexant might be a dream come true. It's leading a new class of insomnia treatments that offer safety advantages over the current market leaders offered by companies like Sanofi (NYSE:SNY) and Dainippon Sumitomo. Merck filed a new drug application that will soon lead to an FDA decision, and the company has a healthy lead on the nearest competing drug from GlaxoSmithKline (NYSE:GSK). With all these dreamy signs in its favor, should Merck investors count revenue sheep?
The insomnia market is worth winning. For instance, Sanofi's group of Ambien drugs garnered €490 million in global sales in fiscal 2011 despite facing competition from Dinippon Sumitomo Pharma's Lunesta, Takeda's Rozerem, and various generic options. In terms of gaining a competitive edge in this market, there's nothing's more important for a successful treatment than safety. Suvorexant belongs to the emerging class of orexin inhibitors – drugs that block brain chemicals that cause wakefulness. These drugs have a more targeted approach than the sedative-hypnotic drugs, like Ambien and Lunesta, which have a broader action that can have several side effects.
The FDA requires that sedative-hypnotics display strong warning labels, because patients can wind up performing daily activities, such as talking or driving, while fast asleep. In contrast, Phase III results for Merck's suvorexant suggest that the drug would be safe to use over the long term. Nearly 800 patients participated over the course of a year, with the purpose of studying the drug's safety and tolerability. Reports of adverse effects were a mere 6% higher in patients taking suvorexant compared to placebo, and the chief complaint was sleepiness, which still only occurred in 13%. Patients who were switched from suvorexant to placebo after a year showed no signs of other adverse effects or withdrawal symptoms.
Suvorexant may not win on price, because some of the drugs in this space have fallen off the patent cliff, and cheaper generics are now available. However, suvorexant could appeal to patients experiencing severe side effects from sedative-hypnotics, or those who want a long-term treatment. Sedative-hypnotics might remain popular for short-term use, such as when a particular event is causing insomnia symptoms.
Pharma powerhouse GlaxoSmithKline teamed with Swiss company Actelion to investigate orexin drugs in 2008. Their previous joint effort stalled in Phase III trials last year amid unspecified safety concerns. Now, they're playing the data for their new Phase II candidate close to the vest. Even if the drug proves safe, suvorexant will have a head start, which would require Glaxo to prove that its treatment works better to become the sales leader.
Foolish Final Thoughts
Merck is a well-rounded dividend payer that has stayed near the top of the big pharma pack, outperforming the S&P 500 for most of this year. The concern for potential Merck investors shouldn't be whether to invest, but rather, what price is right. With Merck currently trading up 18% year-to-date and brushing up against the 52-week high, Fools might want to wait for a pullback before buying in.
Merck has so many released and pipeline products that one drug's fate won't dramatically affect overall revenues. That being said, suvorexant's approval would give the company a running start in a potentially game-changing new drug class.
Brandy Betz has no positions in the stocks mentioned above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.