It's been roughly four weeks since pharmaceutical juggernaut Merck (NYSE:MRK) delivered mixed fourth-quarter earnings results that left investors scratching their heads and wondering where this company is heading next.
For the quarter, Merck announced a 3% drop in total sales to $10.22 billion, although it dealt with a 7% adverse effect from currency fluctuations, and benefited 3% from acquisitions and divestments. Wall Street, for comparative purposes, was looking for $140 million more in sales.
On the flipside, Merck's adjusted net income rose by $104 million from Q4 2014, and the adjusted EPS of $0.93 that it reported was 7% higher than in the prior-year quarter. It also surpassed the Street's expectations by $0.02. Yet Merck's full-year EPS guidance and sales forecast for 2016 missed the mark at the midpoint. It was truly a mixed quarter.
Three critical comments from Merck's management you won't want to miss
So how does a shareholder or interested investor make sense of where Merck is headed next? The answer can be found in looking beyond the headline numbers and a few paragraphs in a press release, and taking the time to listen to Merck's management team discuss its near- and long-term outlook during the company's Q4 conference call.
No one knows this company better than the people running it. With this in mind, here are the three most important comments from Merck's fourth-quarter conference call.
Merck's rebirth is finally here
"In fact, 2016 represents the first year in several years in which Merck's new product sales growth, driven primarily by ZEPATIER, our new hepatitis C product, and KEYTRUDA, are expected to contribute meaningfully above the impact of the products that are losing exclusivity." -- Ken Frazier, CEO
Merck shareholders rejoice, because CEO Ken Frazier just clued investors into the fact that Merck's patent cliff may officially be a thing of the past.
For Merck, patent losses, pricing pressure, and increased competition have packed quite the punch for previously productive medicines. For full-year 2015, sales of former blockbuster Singulair dropped 15%, Pegintron revenue tumbled 52% year-over-year, and Nasonex sales dipped 21%. For years Merck has struggled to overcome this downward momentum -- but in 2015 we saw a modest change. Looking at Merck's 2015 results on an operating basis (i.e., excluding currency moves, acquisitions, and divestments), Merck managed to grow its sales in every quarter, albeit modestly. Looking ahead, though, Frazier sees the potential for marked growth.
I believe Frazier's use of "meaningfully" here suggests that operational growth is expected to be notably higher than the low single-digit percentage growth we've been accustomed to over the past year. This growth is being led by cancer immunotherapy product Keytruda, which is being studied in more than 100 combinations and over 30 tumor types. Keytruda managed to generate $560 million in sales in 2015, and the prospect of further label expansion, as well as Merck's push into second-line metastatic non-small cell lung cancer, could help push Keytruda over the $1 billion mark in 2016.
Zepatier is going to be a bit of a wildcard for Merck. There's a huge market for hepatitis C treatments, and Merck certainly has some differentiation that could give its therapy the nod over Gilead Sciences' Harvoni. Plus, it makes sense that Merck's pricing strategy could give it an "in" with insurers.
However, Merck's HCV therapy still needs to be taken in conjunction with ribavirin in some instances (taking ribavirin can lead to rashes and anemia), giving Harvoni a comfortable edge in patient quality of care that it's likely to maintain for some time. The rapport Harvoni has built up with physicians could also be tough for Zepatier to overcome.
We're aggressively seeking acquisitions
"[B]usiness development remains a critical part of our strategy because we need to pair both our internal work with the best external innovation opportunities, and we're looking to augment our Phase II as well as our early stage pipeline with these kinds of partnerships and collaborations and bolt-on acquisition" -- Frazier
Another key point of Merck's conference call presentation was CEO Frazier's use of the word "aggressively" very early on when describing the company's business development (BD) strategy. In layman's terms, it just means that Merck is very much counting on acquisitions to drive its growth in the near- and long-term.
What Frazier really fleshed out for investors is exactly what sort of BD the company might be interested in. Whereas some of Merck's peers are targeting established products or late-stage assets which are more proven, Merck's bread-and-butter bolt-on acquisition, according to its CEO, is likely to come from companies in early and midstage drug development. At this point in the development process Merck believes it can discern some degree of safety and efficacy without having to get into a bidding war with its peers, as sometimes happens with late-stage and commercial assets. Buying early and midstage products also gives Merck the ability to control the late-stage development process.
Additionally, Frazier mentioned "oncology and other therapeutic areas" when discussing BD opportunities. The specific mention of oncology sure appears as if Frazier is tipping his hand as to where Merck is going to focus its buying opportunities in the near future.
Januvia's outlook: Not as dire as first believed
"When you look at 2016, despite increasing pricing pressure that we'll see in the United States and the biannual price declines that you see in Japan, we expect to grow the [Januvia] franchise globally when you exclude exchange, and what that means with regard to EMPA-REG, we don't see a significant impact in 2016. In fact, if you look at the earliest data that you can look at, we're are seeing market share shifts within the SGLT2 class, but we're not seeing shifts between classes, between DPP-4s and SGLT2s." -- Adam Schechter, President of Global Human Health, Executive VP
Lastly, it appears we can stop waving the red flag on type 2 diabetes blockbuster Januvia, whose sales globally fell by 12%, or 6% on an operating basis, during the fourth quarter.
Merck's Q4 results painted a potentially scary picture with Januvia's sales falling, especially when taking into account just how much money Merck's spent in marketing and buoying Januvia, a drug that accounts for about $6 billion in annual sales. The initial fear had been that SGLT2 inhibitors, like Eli Lilly's and Boehringer Ingelheim's Jardiance, were taking market share following Jardiance's stunning performance in EMPA-REG when it reduced patients' risk of death by 32%. However, as we heard from Schechter, channel reductions, and not Jardiance, are to blame for Januvia's disappointing fourth-quarter sales.
It's also worth noting that Schechter continues to see switching within classes but not between classes. This may signify that Jardiance is garnering more share, but in general it means that DPP-4s like Januvia and SGLT2s remain complimentary and not competitive.
Merck still has some challenges to work through in terms of pricing for key products, and it'll need to successfully launch Zepatier, but I'd consider management's commentary to be surprisingly refreshing and potentially cause for investors to consider digging deeper into Merck for their own portfolio.