Merck's mixed quarter
For the quarter, Merck generated $9.31 billion in sales, a 1% decline from the year-ago period. However, the company also contended with a 4% adverse impact from foreign-currency translation. Translation: Merck's operating sales growth totaled 3% in Q1.
From the perspective of profits, Merck earned $2.49 billion in net income, a modest $66 million improvement from Q1 2015. But thanks to its aggressive share-repurchase program, adjusted EPS improved 5% to $0.89 during the quarter.
On a comparable basis, Wall Street was expecting Merck to report just $0.85 in EPS, in line with what it delivered last year, so this was a pleasant upside surprise. Unfortunately, Merck missed the Street's revenue expectations by more than $100 million -- and paid the price for it, despite narrowing and upping its full-year sales and EPS guidance. Shares of Merck finished lower by around 2% on the day of its earnings announcement.
But what these headline numbers don't tell us is where Merck is headed next, which is arguably a lot more important than looking in the rearview mirror. For that, we'll turn to Merck's quarterly conference call and weed out the most-important tidbits of information offered by its management team.
1. Merck wants to go shopping
Business development remains one of our most important priorities, and we are very actively engaged in finding the best external innovation that will help grow our portfolio and pipeline. ...Obviously immuno-oncology would be one leading area, but we are also willing to do business development if we think we can get an asset that we can leverage inside our portfolio for a leadership position.
--Ken Frazier, CEO
It's no great surprise that Merck wants to use its bountiful free cash flow and cash on hand to make acquisitions and thereby bolster its early-stage pipeline and product portfolio. What was intriguing was that CEO Ken Frazier mentioned how important business development was to Merck's growth strategy early on in his Q1 prepared statements.
More importantly, we also saw Frazier pinpoint cancer immunotherapies as one of Merck's primary acquisition targets. The company's announced purchase of privately held IOmet in January is a good example of this, with Merck gaining access to IOmet's preclinical IDO1 and TDO inhibitors, which can potentially be tested in combination with Keytruda. I'd be looking for more deals to cross the wires before the year is through.
2. Januvia is still in decent shape
The Januvia franchise had a strong quarter, growing 4% globally. In the United States sales grew 9%, driven primarily by volume increases and some benefit from customer buying patterns. ... First-quarter results for Januvia demonstrate that we can continue to grow volume and retain strong market share of about 75% in the United States and 65% globally. We continue to expect global Januvia franchise growth, ex-exchange, in 2016.
--Adam Schechter, President, Global Human Health
One of the biggest concerns heading into Q1 was just how well type 2 diabetes drug Januvia would fare, considering that its sales fell on an operating basis by 6% from the prior year in the sequential fourth quarter. What the quarter delivered was a 1% increase in sales, or 4% excluding the adverse effects of currency translation. Growth was most pronounced in the U.S., where sales of Januvia jumped 9%.
Schechter's commentary regarding Januvia was expected to be upbeat, because this is a quarterly conference call with analysts. But the fact that he expects leading DPP-4 inhibitor Januvia to retain its U.S. market share, despite a dynamic and competitive market that's evolving with the proliferation of next-generation SGLT2 inhibitors, is encouraging. Nonetheless, Januvia is in the mature stage of its growth cycle, and Merck will need to look elsewhere to move the needle.
3. Zepatier stumbles
In the course of our European review for Zepatier, the European Medicines Agency cited Merck's third-party manufacturer for issues largely related to inadequate record-keeping and the need for improvement in their quality management systems. We're working assiduously with regulators to resolve these issues. ... Our European launch will be delayed until the fourth quarter, or perhaps until the end of the first quarter of 2017, depending on how quickly these matters can be resolved.
--Roger Permlutter, President, Merck Research Laboratories
The lowlight of Merck's Q1 results was the $50 million in sales it wound up netting from Zepatier. No one on Wall Street was exactly expecting a Sovaldi- or Harvoni-like entrance as we saw when Gilead Sciences' (NASDAQ:GILD) hepatitis C drugs hit pharmacy shelves and promptly racked up billions in sales. However, $50 million seems well below investors' expectations. For what it's worth, Merck feels confident in full-year sales estimates of around $650 million for Zepatier.
We also learned from Roger Permlutter that record-keeping and potential quality issues at a third-party manufacturer could further delay Zepatier's EU launch, giving Gilead's HCV regimens even more time to cement their dominant lead in the space. Zepatier, which occasionally needs to be administered with a ribavirin, offers similar efficacy to Harvoni; but in terms of quality of life during treatment and rapport with physicians, Gilead's Harvoni will be very difficult to unseat.
4. In case you forgot...
Separately the long-awaited adjudication of our Phase 3 odanacatib data is now almost complete. With these data in hand, we will at last be in a position to assemble regulatory dossiers supporting the registration of this important once-weekly treatment for osteoporosis.
Don't worry, folks -- Roger totally redeemed himself when he announced that experimental osteoporosis therapy odanacatib was back on track for a new drug-approval filing sometime this year after an extended wait. For those who may not recall, in September 2014, Merck reported that its once-weekly dose of odanacatib reduced vertebral fractures by 72%, cut non-vertebral fractures by 23%, and led to a 47% risk reduction in clinical hip fractures.
Although peak annual sales models for odanacatib are all over the place, its strong trial efficacy could allow for odanacatib to surpass $1 billion in annual sales within its first three or four years on pharmacy shelves, if approved.
5. Keytruda is growing, but Opdivo is soaring
If you look at where sales [of Keytruda] are coming from, the vast majority of the sales are still coming from melanoma indications. And if you look at that, a lot of it is still coming in second-line, although we see first-line continuing to grow. As you start to think about lung, we are seeing increases in the number of physicians that are testing patients now. A lot of those increases are actually coming from patients with first-line lung being tested.
Finally, when answering questions concerning cancer immunotherapy Keytruda's expansion into second-line non-small cell lung cancer (NSCLC), Adam Schechter danced around pinpointing a precise market-share figure that would identity how it's performing in second-line NSCLC. Instead, Schechter points out that Keytruda remains dominant in second-line metastatic melanoma, which is where the bulk of its growth has derived.
The above statement by Schechter is telling for two reasons. First, it likely establishes Bristol-Myers Squibb's (NYSE:BMY) Opdivo as the superior second-line NSCLC therapy because it can treat patients regardless of PD-L1 tumor expression levels, while Keytruda is only approved to treat patients with high PD-L1 expression. Despite beating Opdivo to market, Keytruda's $249 million in Q1 sales puts it well behind Opdivo's $704 million in total first-quarter sales.
Schechter's commentary about first-line NSCLC being tested also confirms the suspicions we've had about Celgene's (NASDAQ:CELG) Abraxane all along – namely, that cancer immunotherapies being tested in first-line indications have reduced demand for the drug in the United States. If you recall, Celgene recently tempered its 2017 forecast, mainly on account of weakness in Abraxane sales, which have seemingly stalled around $1 billion annually.
Long story short, Merck has some questions to answer in the coming quarters. With Januvia's growth slowing, Zepatier's launch disappointing, and Keytruda taking a back seat to Opdivo, Merck's going to need to find a way to differentiate its pipeline and product portfolio to incite growth. Odanacatib could be one therapy that does this, but Merck's probably going to need a lot more than just one possible blockbuster to sway a fussy crowd of investors.