The Super Bowl for the National Football League doesn't kickoff until next month, but when it comes to the healthcare sector, the Super Bowl of conferences kicked off yesterday. The J.P. Morgan Healthcare Conference features more than 400 healthcare companies showcasing where they've been and where they're headed next. Pharmaceutical giant Merck (NYSE:MRK) was one of those lucky enough to present yesterday.
What you need to know about Merck
As you probably expected, CEO Ken Frazier spent quite a bit of time discussing how Merck has been a game-changer for multiple decades. For instance, Merck's dominance in type 2 diabetes with Januvia didn't happen by accident -- it's a product of the company's enormous investments in research and development and its diverse product portfolio and pipeline.
However, the second half of Frazier's presentation focused on the meat and potatoes of where Merck is headed in the coming years. I'd encourage Merck's shareholders and interested investors to listen to Frazier's 22-minute presentation as it's incredibly informative and will give you a better perspective on the company as a whole. But, in case this busy week has you short on time, here's a brief recap of three things you absolutely must know about Merck based on its conference presentation, with three accompanying slides.
1. "A pipeline within a product"
If there was one catchphrase that stood out from Frazier's presentation it was the idea that cancer immunotherapy Keytruda, the first-approved anti-PD1 therapy, is "a pipeline within a product."
What could cause Frazier to make such a bold statement? Its clinical data and early sales results have pretty much done all the talking. Keytruda and its primary competitor, Bristol-Myers Squibb (NYSE:BMY) with Opdivo, have given certain metastatic melanoma and advanced non-small cell lung cancer patients new hope. These immunotherapies, which work best when targeted at tumors expressing PD-L1, have demonstrated response rates in excess of 50% in many clinical trials, including advanced NSCLC, which in some cases is about double what was being observed in previous standards of care. Not surprisingly, Merck's Keytruda and Bristol-Myers' Opdivo are both expected to generate multi-billions in annual sales at their peak.
But, what became apparent in Merck's presentation is just how enormous Keytruda's reach could eventually become. As you can see from the slide above, Keytruda is being studied in more than 200 clinical trials, and more than 80 combination studies. This is an insanely large number of possible expansion opportunities for Keytruda, and it certainly supports Frazier's notion that Keytruda could one day have its own vast portfolio of label indications. It also doesn't hurt that Keytruda is the drug responsible for the complete remission of former-President Jimmy Carter's metastatic melanoma.
2. Bolt-on acquisitions are the future
Secondly, we learned just how critical acquisitions are to bolstering Merck's growth. Although Frazier spoke to some extent about being agnostic with regard to acquisition size, he also made it clear that Merck's goal is to bolster its pipeline development in the early and mid-stages. This would generally exclude most large drug developers from Merck's M&A radar.
As Frazier noted during the presentation, Merck's purchase of cCam Biotherapeutics added quite a few early stage immunotherapy candidates, its acquisition of Idenix Pharmaceuticals bolstered its hepatitis C pipeline, and its purchase of Cubist expanded its acute hospital care product portfolio.
You'll also note the "more to come" tab in the lower right-hand corner of the above slide. Just yesterday Merck announced the acquisition of IOmet, although financial terms of the deal were not disclosed. This privately held U.K.-based company with IDO1 and TDO inhibitors should be the perfect complement for Merck's expanding immuno-oncology platform.
Look for more acquisitions to come in 2016 and beyond.
3. Key catalysts for 2016
Lastly, it's important for Merck's investors to understand exactly what sort of critical data, filings, and approvals to expect in 2016. Luckily, Merck's laid everything out in one easy-to-follow presentation slide.
In terms of approvals, even though expansion opportunities for Keytruda are exciting, the real wild card is Merck's hepatitis C doublet of grazoprevir and elbasvir. Investors have been waiting for a company to challenge the convenience offered by Gilead Sciences' (NASDAQ:GILD) Harvoni in treating HCV genotype 1 patients, and we finally look to have it with Merck's combo therapy. Harvoni's 90%+ sustained virologic response and once-daily dosing make it the preferred option for doctors and patients, so it'll be interesting to see if Merck's doublet can infiltrate that dominance. Gilead's Harvoni isn't cheap at $1,125 per day at the wholesale level, so if Merck's doublet undercuts Gilead's Harvoni on price it's possible it could ween market share from Gilead.
When it comes to regulatory filings, I'd encourage investors not to forget about odanacatib, the company's late-stage osteoporosis drug. In September 2014, Merck reported at the American Society for Bone and Mineral Research's annual meeting that a once-weekly dose of odanacatib led to a 72% risk of reduction in vertebral fractures, a 47% risk of reduction of clinical hip fracture, and a 23% risk of reduction of clinical non-vertebral fractures. This is a drug with clear blockbuster potential, and it's one that should be on your radar.
Two data points to monitor closely in 2016 will be anything first-line treatment related for Keytruda (i.e., first-line NSCLC), and a new triplet combination for HCV. This triplet, which could yield phase 2b data, offers the biggest challenge to Gilead Sciences -- particularly since some of its clinical studies have demonstrated high efficacy over just an eight week treatment period. The easiest way to unseat Gilead is to undercut its treatment timeframe, so this is an exciting advancement to monitor.
Can Merck execute?
Having listened to Merck's presentation, it's evident that the company has a well-laid plan to grow over the long run. Its immuno-oncology platform and diverse portfolio of diabetes products and vaccines offers growth stability and pricing power that could benefit shareholders for years to come.
The big questions are whether its drugs can compete in very competitive landscapes (i.e., oncology and HCV), and if its acquisitions will pay dividends as expected. Although we don't have the answers to these questions as of yet, investors who are looking to hold for the long-term should be rewarded by a company with an above-average dividend yield and strong cash flow.