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Shares of Big Pharma Merck (NYSE:MRK) struggled mightily in September, ending the month lower by 7.5% according to data from S&P Capital IQ. Since August 19, Merck's stock has dropped by almost 17%, wiping out more than $27 billion in market value.

What's to blame? It looks to be the combination of growing competition in the diabetes space and commentary from Hillary Clinton.

The big concern for Merck was the announcement in late August (and again in September) that Eli Lilly's (NYSE:LLY) and Boehringer Ingelheim's SGLT-2 inhibitor Jardiance, an oral type 2 diabetes drug, actually reduced cardiovascular event risk in patients who are at a high risk of having a CV event, such as a heart attack or stroke. In the EMPA-REG OUTCOME study, Jardiance led to a 38% decline in deaths from heart complications, a 35% reduction in hospitalizations due to chronic heart failure, and a 32% drop in deaths from any cause.

This is meaningful, because Merck's DPP-4 inhibitor, Januvia, is a $6 billion per year drug, and in a cardiovascular outcomes study it didn't show a statistically significant reduction in cardiovascular events. Also, SGLT-2 inhibitors have the added bonus of weight-loss as a side effect, whereas DPP-4 inhibitors are weight-neutral. Long story short, Januvia could slowly be phased out by next-generation diabetes therapies, and investors are clearly concerned.

The other issue last month was a prescription drug reform proposal from presidential candidate Hillary Clinton. Clinton's proposal aims to remove some of the pricing power drug developers currently enjoy, and it's squarely aimed at high-priced therapies. Keep in mind that Merck's cancer immunotherapy Keytruda, which was recently approved to treat non-small cell lung cancer in addition to its advanced melanoma label, carries a $150,000 wholesale cost per year.

The big question on everyone's mind is whether or not Merck can bounce back from its awful past couple of weeks.

Januvia

Source: Merck.

On one hand, the prospects for cancer immunotherapy Keytruda continue to grow. After expanding into NSCLC, it's looking more and more likely that Keytruda could have plenty of use in solid tumor types as a second-line indication and above. This alone could mean $3 billion to $5 billion in peak annual sales within a decade.

On the other hand, Januvia's potential slow demise at the hands of SGLT-2 inhibitors could act as a cement block on the stock for many quarters to come. With physicians trusting the Januvia brand, it's unlikely that the drug would simply fall off the map even with Jardiance's recent outperformance. However, sans substantial price increases, I'd anticipate Januvia's demand and revenue is probably going to drop.

My opinion is that there's little reason to rush into owning Merck until we see its growth prospects improve. While long-term investors will certainly benefit from its superior dividend, its stock price could remain range-bound for the foreseeable 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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