Source: Merck & Co.

It's been about a month since pharmaceutical giant Merck (NYSE:MRK) reported its third-quarter results, but time hasn't changed the fact that Merck's been struggling mightily with patent expirations and increased competition for its key drugs.

In its third-quarter report, Merck delivered a decline in sales of 4% to $10.56 billion as its adjusted profit fell by roughly 2% to $0.90 per share from the year-ago period. In total, Merck's revenue slightly missed the mark set by Wall Street, while its profit topped expectations by $0.02 per share. Merck blamed its woes on steep revenue losses in asthma medication Singulair, which went off patent in 2012 and has seen its sales slide precipitously ever since. Sales of brain cancer drug Temodar also fell dramatically to just $264 million through the first three quarters of 2014 despite nearly $600 million in sales at this time last year.  

However, simply examining a few paragraphs from an earnings report is unlikely to give you a thorough enough picture on the health of a business. In order to intimately understand how a company is performing, we have to be willing to dig into a company's conference call and really listen to management's message to investors.

Courtesy of S&P Capital IQ, here are the five things Merck's management team wants you to know following the third quarter.

Januvia is still critical to Merck's success

In our diabetes business, we reallocated resources and invested significantly in Januvia and have now reported our second consecutive quarter of growth in the US and in international markets. This marks an important turnaround from where we were last year. -- Ken Frazier, Chairman and CEO

It's an oft-forgotten point, with Merck so focused on cost-cutting and its recently approved cancer drug Keytruda, that DPP4 inhibiting diabetes drug Januvia is critical to its intermediate-term performance. Januvia/Janumet (Janumet is the overseas brand-name) contributed to 16% of the $9.1 billion in pharmaceutical products sales for Merck in the third quarter.

There had been some concern with the approval of Farxiga and Invokana that SGLT2 inhibitors could push DPP4 inhibitors to the wayside. However, early indications are that DPP4 and SGLT2 may act better as complementary rather than competitive medicines. This bodes well for the roughly 75% DPP4 market share threshold Merck is attempting to hold and would signify that the drug is in great shape, with its basic patents still years from expiring.

But, Keytruda is the future

We continue to study KEYTRUDA in more than 30 different tumor types and are encouraged by recent data presented at the European Society for Medical Oncology in five different cancers. -- Ken Frazier

Even with significant investments in Januvia that'll help sustain its cash flow over the next few years, Merck's chance of sustainable top-line growth will be determined by whether or not anti-PD1 therapy Keytruda succeeds.

Source: Merck & Co.

Keytruda is unique in that it's one of the first cancer immunotherapies approved in the U.S. Immunotherapies work by enhancing the body's immune system to recognize cancer cells that would otherwise go undetected. Because of their unique properties, it's possible cancer immunotherapies could have multiple applications beyond just advanced melanoma. According to Ken Frazier, Merck is testing its potential blockbuster in a whopping 30 indications, including non-small cell lung cancer, which has my full attention.

I believe this hits on two key points investors need to know about Merck. First, it's willing to try anything and everything to ensure Keytruda hits its full potential. And secondly, Merck is perfectly willing to entertain the idea of combination therapies if it means improving patient quality of life and driving its top-line growth along the way.

We see plenty of paw-tential here

The same approach [in regard to Merck's strategic business review] led us to a different conclusion with regard to our Animal Health business, which we believe will continue to generate long-term value for Merck. Animal Health saw strong growth this quarter across all species. We look forward to additional innovation coming out of our Animal Health pipeline and remain committed to growing this business which is already a market leader in key segments of the global Animal Health market. -- Ken Frazier

Source: Flickr user Brad Holt.

Whereas Merck has been a busy bee selling off noncore assets, including its consumer care segment to Bayer, as well as divesting its human health products business, Frazier makes it clear that it plans to hang onto its animal health division -- and I think it's a smart move.

Annual pet expenditure growth has been traipsing along in the mid-single digits for about two decades. Between the increasing need for cattle to supply food for the world, to the growing number of households that claim a pet as a family member (91% of families owning a pet, according to a 2012 Harris Interactive poll), animal health drug developers are a smart bet to steadily grow for years, if not decades, to come.

Keytruda's launch is flawless so far

Regarding access, most payers are covering the cost of KEYTRUDA for its current indication without restrictions. As we said at approval, we believe there are about 1,200 patients in the U.S. who are eligible for KEYTRUDA based upon our current label. Additionally, we expect a few hundred new patients to become eligible for treatment with KEYTRUDA each month. Since approval in early September, we believe that approximately 900 patients are being treated with KEYTRUDA. Many of these patients were previously part of the expanded access program and are now in a process of moving from the EAP to commercial product. -- Adam Schechter, Executive VP, President Global Human Health

Just in case you were looking for more clues as to how well or poorly Keytruda is doing in the early going, Adam Schechter was happy to oblige. The key thing to note about Schechter's comments is that Merck is having no issues getting its cancer product approved with insurers. Reimbursement concerns can be a potentially big problem for patients and physicians, and it's one of the primary reasons prostate cancer immunotherapy Provenge, made by Denderon, struggled so mightily.

Based on the commentary here, and Keytruda's $12,500 per patient, per month price tag, Keytruda should be able to generate in the neighborhood of $15 million in sales per month as an advanced melanoma option of last resort. Overall, this roughly $180 million in annual sales will probably seem like a drop in the bucket to its other possible indications, but it's nonetheless a great start for Keytruda.

Don't forget we have an advancing hepatitis C pipeline

I remind you that the FDA has granted breakthrough designation to these agents for the treatment of hepatitis C virus infection. Indeed the Phase 3 registration program for MK-5172 8742 is now completely enrolled and we expect to see data from these studies in the first half of 2015. -- Roger Perlmutter, Executive VP, President Merck Research Laboratories

Lastly, Merck wants its investors to know that it should still be taken seriously in the hepatitis C field even with Gilead Sciences' Harvoni and Sovaldi beating all other next-generation interferon-free drugs to market.

Merck's hepatitis C combo of MK-5172 and MK-8742 delivered an impressive sustained virologic response (essentially no detectable level of HCV) in 98% of mid-stage trial patients as reported in April. Combined with its Idenix purchase, which will likely lead to Idenix's nucleotide compounds being putting in the spotlight, it's possible Merck could harness a sizable chunk of the hepatitis C market within a few years.

Furthermore, as a breakthrough designated combo, Merck's therapy could wind up in front of Food and Drug Administration regulators as soon as next year, and it may be an option for HCV patients in 2016. It's certainly a combo worth keeping an eye on as the hepatitis C treatment scope is wide enough to support a handful of players.

At a crossroads
As it stands now Merck is really at a crossroads. On one hand patent exclusivity losses are expected to wreak havoc on its top- and bottom-line for years to come. On the other, it has an exciting new cancer therapy in Keytruda and a promising number of hepatitis C compounds. As for me, I continue to believe the safest place for investors now is on the sidelines until we see a marked improvement in sales growth. 

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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