For the fourth quarter, Merck announced revenue of $10.48 billion, down 7% from the prior-year period, of which 3% was blamed on negative foreign currency translation and a 4% drop in sales. Adjusted profits also fell slightly to $0.87 per share from $0.88 in the year-ago period. While these results did meet Wall Street's estimates almost head on, they don't tell us a whole lot about the true health of the company.
To get a better idea of what's really going on behind the scenes at Merck we have to turn to its conference call and listen to what its management team had to say. No matter how closely analysts and investors follow a stock, only its management team can give us the most intricate clues as to where the company may be headed next.
Here are the five most important thing Merck's management team wants you to know after its latest quarterly report.
Shareholder incentives will remain high
"The past year allowed us to return approximately $13 billion to shareholders through our dividend and share repurchases. In 2015, our framework for deploying capital will remain consistent."
-- Ken Frazier, chief executive officer
Following a year where Merck's revenue declined, and guidance was issued that suggest further sales erosion in 2015, its CEO, Ken Frazier, tried to calm shareholders down by announcing that it planned to once again reward them in a big way.
According to Frazier, Merck paid out $13 billion last year in incentives, which includes dividends and share buybacks. Merck has historically not raised its dividend very quickly, so my gut instinct says to expect a substantial amount of share buyback activity in 2015. Share buybacks help to reduce the number of shares outstanding, thus boosting EPS and potentially making a stock look more attractive on a valuation basis. The one warning I'd have for investors about share buybacks, though, is that they're good at masking a lack of organic growth, which is exactly what we have with Merck at the moment.
The patent cliff is still very real
"We will lose patent protection for Remicade this month across the remainder of our European markets. We expect competition for biosimilars to begin upon patent expiry. While we believe we will retain many current patients being treated with Remicade, we will face increased competition for new patients and there will be mandatory price reductions in certain markets."
-- Adam Schechter, executive vice president and president, Global Human Health
Although the pharmaceutical industry as a whole has moved past the worst of the patent cliff, Merck is still facing the loss of exclusivity on a key drug in 2015.
According to Adam Schechter, anti-inflammatory drug Remicade lost patent protection in January in the remaining European markets which it hasn't already faced biosimilar competition. Remicade still brings in more than $2 billion annually in sales for Merck, and losing exclusivity on this drug, along with the recent retiring of hepatitis C therapy Victrelis and the exclusivity loss a few year ago of asthma medication Singulair, has to hurt. It sounds as if Merck will continue to sell the drug in these markets, but at a significantly reduced price point.
Keytruda's launch has been flawless
"Virtually all claims for the labeled indication [of Keytruda] are reimbursed without restriction within two months."
Maybe the most important thing I heard during the entire conference call was Schechter's announcement that nearly all of the approximately 2,000 patients being treated with Merck's new anti-PD-1 inhibitor Keytruda were able to get insurance coverage. This is critical, as Keytruda is an innovative and expensive therapy, which the company has priced at $12,500 per month, or $150,000 per year. With price not being an obstacle for patients it means improved quality of life and a quick launch for Merck's key drug.
Additionally, Roger Perlmutter, executive vice president and president of Merck Research Laboratories, had this reminder for investors (consider this a bonus quote!): "As previously disclosed, we intend to file for approval of Keytruda in the treatment of non-small cell lung cancer in mid-2015."
It's not out of the question that Keyrtuda could be approved in NSCLC before the end of the year, since this is a sorely unmet cancer indication that could use a transformational therapy.
Surprise! We have a deep pipeline
"Summing over the calendar year in 2014, we received U.S. approval for more new molecular entities, that is new drugs and vaccines, than in any previous year in the history of Merck & Co."
The primary focus for Wall Street has been Merck's struggling top line, but the company actually has a number of potential pipeline catalysts right around the corner. As Perlmutter noted, Merck received more approvals in 2014 than during any other year in its history.
As of Oct. 31, Merck listed 11 drugs in midstage trials, 14 in phase 3 trials, and another six under review. We've obviously seen some shifting since the end of October, but the key point being that Merck has more than two dozen opportunities to garner drug approvals within the next one to five years. These include the expansion of Keytruda into other solid tumor possibilities, ongoing research into innovative Alzheimer's disease therapies (MK-8931 and MK-7622) and of course the advancement of its hepatitis C product portfolio.
We will be competitive in hepatitis C
"Results from some of these phase 3 studies demonstrating the favorable attributes of our doublet [HCV] therapy will be presented at the European Liver meetings to be held in Vienna in April."
Catalyst alert! Catalyst alert! Merck's hepatitis C doublet of MK-5172/MK-8742, known also as grazoprevir/elbasvir, should have a data readout for interested investors at the European Liver meetings in April.
Although Merck's hepatitis C combo has delivered strong results in midstage studies, the Food and Drug Administration stripped it of its breakthrough therapy designation this past week, given the recent approval of three HCV therapies -- Harvoni, Sovaldi, and Viekira Pak. Wall Street and investors are eagerly awaiting this phase 3 readout data, as it'll give everyone a good indication of how competitive this doublet therapy may ultimately be.
But, as Schechter also noted, "I want to remind you we have the doublet coming which we are excited about but we are also excited about the potential of a triplet in the future as well." So keep in mind that Merck's research into HCV therapies may just be getting started.
A long road ahead
In spite of an upbeat conference call, it's apparent that Merck has a very long road ahead of it. Keytruda and its hepatitis C doublet are going to play a key role in halting its year-over-year revenue slide, which I believe will mark the first step of a genuine turnaround. Merck has done what it can with cost-cutting and shareholder incentives, but these tools can really only pull a stock so far. We're likely still a year or two away from Merck truly turning the corner, which to me means no need for investors to necessarily rush into Merck stock here. I would, however, keep the company at the ready on your watchlist.
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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