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Source: U.S. Army RDECOM via Flickr

Simply put, there is no other sector that values the future more than healthcare. Whereas most businesses have tangible products they produce and sell shortly following their founding, pharmaceutical companies need to be built from the ground up when it comes to research and development, resulting in years, or even decades, before some see an approved drug or the chance of a profit.

The heartbeat of a pharmaceutical company is their drug development pipeline, because that's where Wall Street places a good portion of a company's estimated valuation. Though no two pipelines are ever quite the same, one pattern that tends to hold true is there are always a handful of experimental drugs within each pipeline that act as the pivots for the future. In plainer English, some drug development pipeline drugs hold more weight than others.

Today, I'd suggest we take a closer look at Merck's (NYSE:MRK) drug development pipeline in order to get a better idea of how well the company is preparing for its future beyond patent expirations, as well as note which handful of developing drugs are the most likely to lead it to success (or failure).

Merck's drug development pipeline
At the moment Merck is currently working with a total of 28 experimental drugs that are in mid-stage clinical studies (10), late-stage clinical trials (13), or under review by the Food and Drug Administration (5). Merck doesn't disclose the number of ongoing early stage studies on its website, which is probably a smart move since phase 1 studies are geared more toward safety data than efficacy.

Merck Us Lab
Source: Merck & Co. 

Why are these pipeline products so crucial to Merck's success? Because the patent cliff has been hammering this big pharma giant. Merck has seen patent exclusivity go away on asthma drug Singulair, which at its peak brought in $5 billion per year, as well as brain cancer drug Temodar. Beginning in late 2016 and moving into 2017 Merck will also witness its blockbuster cholesterol-fighting duo Zetia and Vytorin begin to lose their protection from generic competition. In short, Merck needs to hit a few home runs in the next couple of years if it's going to stay ahead of the curve and keep its shareholders happy.

Three developing drugs you should be watching
The way I see there are three drugs in Merck's drug development pipeline that have make-or-break potential, and which investors should be placing their utmost attention on.

First is odanacatib, Merck's late-stage drug to treat osteoporosis. As you might imagine, with baby boomers retiring in greater numbers and life expectancy in the U.S. on the rise, the need for bone-strengthening drugs is only likely to increase over time. Odanacatib could perfectly fill that role.

Just last month Merck announced at the American Society for Bone and Mineral Research's annual meeting that once-weekly odanacatib met its primary endpoints in a phase 3 fractures outcome study, and "significantly reduced the risk of osteoporotic hip, spine, and non-vertebral fractures compared with placebo." The data specifically pointed to a 72% risk of reduction in clinical vertebral fractures, a 47% risk of reduction of clinical hip fractures, and a 23% risk of reduction of clinical nonvertebral fractures. As it sits now, odanacatib is on pace for a new drug application filing in 2015 and has the potential to generate $2 billion-$3 billion in estimated peak annual sales.

Secondly, I think it's important to watch the development of anti-PD-1 drug Keytruda in alternate indications -- specifically with regard to non-small cell lung cancer, or NSCLC.

Keytruda

Source: Merck & Co.

If you recall, Keytruda was approved in early September as a treatment for advanced-stage melanoma after it demonstrated tumor shrinkage in 24% of patients receiving the drug, with a duration of response ranging from 1.4 months to 8.5 months. This may not sound like a lot, but considering that it was examined as something of a last resort treatment, these statistics are encouraging.

Where Keytruda could hold its most promise is as a treatment for NSCLC, for which it's currently in midstage trials. NSCLC has been a particularly difficult type of cancer to treat over the years, with five-year survival improvements due more to better education about the risk factors associated with lung cancer than with actual medical improvements. Therefore, the hope is anti-PD-1 drugs like Keytruda, which is a cancer immunotherapy designed to bind to PD-1 receptors and help your immune system better recognize and attack cancer cells, will be as effective, if not more effective, in the NSCLC indication. Peak sales estimates on Keytruda vary wildly on Wall Street, but all peak estimates seem to creep up to at least $4 billion in annual sales.

Finally, Merck believes it a real shot at claiming a portion of the hepatitis C treatment market with its combo of MK-5172 and MK-8742, which means you, too, should be keeping a close eye on this combo therapy.

Images

In April, Merck released its mid-stage findings on MK-5172 and MK-8742, showing that its breakthrough designated combo was effective in demonstrating antiviral activity in genotype 1 patients -- the most common but most difficult to treat type of hepatitis C. Its oral combo was tested in a number of indications, including with and without a ribavirin, as well as in treatment-naive and null-responder candidates, but the outcome was pretty consistent: a 90% to 100% sustained virologic response (i.e., an undetected level of disease) after four-to-eight weeks. Currently this combo is in phase 3 clinical testing. 

One more caveat to keep in mind with this hepatitis C combo is that Idenix's hepatitis drug development pipeline could come into play, too. Merck purchased Idenix for a hefty sum of $3.5 billion earlier this year, and I find it likely that Merck is angling to test Idenix's nucleotide-based inhibitors in some form of combination with its existing hepatitis C drugs.

Challenges ahead
Clearly Merck has substantial challenges ahead as a result of patent exclusivity losses, but there are a number of promising products in its drug development pipeline. Hopefully this quick look allows you a better understanding of what experimental drugs are the pillars of Merck's future.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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