Put plainly, Wall Street and investors aren't too happy with pharmaceutical giant Merck (NYSE:MRK) after the company reported its fourth-quarter earnings results before the opening bell.
Merck's top-line takes a beating
For the quarter, Merck watched as its total revenue slumped 7% to $10.48 billion from $11.32 billion in Q4 2013. At fault was a 3% decline caused by negative currency translation (i.e., the effects from a stronger U.S. dollar) and a 4% reduction in sales tied to tougher competition and the expectation of patent exclusivity losses.
Weakness came from a number of areas within its pharmaceutical product portfolio, where sales slipped 4%. Including the negative effects of currency translation, cholesterol drug Zetia/Vytorin had sales dip by 10% or $120 million year-over-year in Q4, Remicade sales sank 10% to $557 million during the quarter, and Nasonex sales tumbled 18% to $268 million.
Bright spots included a 7% rebound in Singulair revenue to $319 million in spite of the drug being off patent, a 34% increase in Proquad, M-MRII and Varivax revenue, and a 2% increase in DPP-4 inhibitor Januvia/Janumet to $1.65 billion. It remains Merck's best-selling drug and was responsible for nearly 16% of its sales this past quarter.
Profit for the quarter came in at an adjusted $0.87 per share, which was down slightly from the $0.88 per share in adjusted EPS reported last year. Comparably, Wall Street was expecting Merck to deliver a profit of $0.86 per share on $10.47 billion in revenue, according to S&P Capital IQ.
One sentence that changed everything
Despite these rather ho-hum results that Wall Street was pretty much expecting, it was one sentence buried within Merck's earnings report that told you everything you needed to know about where its share price was likely headed today.
The sentence in question reads: "On Jan. 30, 2015, the company received notification from the FDA of its intent to rescind the Breakthrough Therapy Designation status for this combination treatment regimen [MK-5172/MK-8742 for hepatitis C], citing the availability of other recently approved treatments for Genotype 1 patients."
The hepatitis C market is huge -- potentially a $20 billion per year industry. Globally there are approximately 180 million people with this disease, including some 3.2 million in the United States per the Centers for Disease Control and Prevention. Merck wants a piece of that pie along with a number of other drug developers. Unfortunately, the Food and Drug Administration may have made their task just a bit more arduous.
Even though Merck announced that its plans to file for a new drug application in the first-half of this year for its HCV combo therapy MK-5172/MK-8742 remains unchanged, losing the breakthrough designation could mean a standard review instead of a priority review, as well as losing any chance of a rolling application while extensive later-stage studies are ongoing. In other words, it means Merck shareholders have to sit on their hands just a little bit longer before this HCV combo has a shot at finding its way onto pharmacy shelves.
That may look like potentially bad news on the surface with Gilead Sciences' Sovaldi and Harvoni, and AbbVie's Viekira Pak already approved and racking up huge sales totals. Keep in mind, though, that even after a full year, Gilead managed to treat less than 150,000 people, so there's more than enough opportunity for a couple of drug developers in the HCV space, including Merck. There could still be plenty of opportunity if Merck's combo is approved.
Merck's "green shoots"
To pull from an adopted phrase that sprouted up shortly after the Great Recession, Merck also exhibited a number of green shoots which lend hope for the future.
Topping that list was its announcement that an estimated 2,000 patients were receiving Keytruda, the company's breakthrough designated cancer immunotherapy that was approved as a last line of defense for certain types of metastatic melanoma in September. The anti-PD-1 therapy wound up generating $50 million in its first quarter on the market and is currently being studied in about 30 other cancers and 20 additional combination settings. I'd suggest the chances of Keytruda finding success in other cancer types is pretty good, and most Wall Street analysts expect Keytruda to achieve blockbuster status.
Merck also witnessed a number of key FDA approvals in 2014 beyond just Keytruda. Belsomra was approved for the treatment of insomnia and Zerbaxa as a treatment for Gram-positive bacteria in the hospital setting. Zerbaxa was a part of Cubist Pharmaceuticals' hospital care portfolio, but Merck announced its acquisition of Cubist late last year. Add in Merck's acquisition of Idenix Pharmaceuticals along with the potential to combine a handful of in-house compounds with Idenix's HCV portfolio, and it's possible Merck could have a nice array of fresh revenue sources soon enough.
For now things look bleak
In spite of these green shoots, things aren't looking great for 2015. Merck's guidance calls for between $38.3 billion and $39.8 billion in full-year revenue, inclusive of a $2.6 billion negative impact from foreign currency translation and around a $1 billion hit from acquisitions and divestitures. Adjusted EPS is expected to be in the range of $3.32 to $3.47. All told, these figures represent a notable drop-off from the $42.2 billion in revenue and $3.49 in EPS the company just reported for the full year. They also happen to be below Wall Street's forecast.
My personal opinion is that investors, for the time being, are giving Merck a pass on its weak results in lieu of Keytruda's approval and the company's integration of Idenix and Cubist. However, I don't anticipate that shareholders will remain patient for long. By 2016 they're going to want to see definitive results, including an end to the revenue slide caused by increasing competition and patent exclusivity losses. I continue to believe investors' best bet is to watch this pharma giant from the sidelines until we see a concrete change in the direction of its sales (and I don't mean just based on currency moves).
As for this year, I'd focus your attention less on Merck's desire to get its HCV combo approved and more on Keytruda and how it performs in a plethora of early and midstage trials.