Merck's Promising Vaccine Empire

| About: Merck & (MRK)

Among the largest vaccine makers, Merck (NYSE:MRK), with a 2012 vaccine revenue of $5.27 billion, ranks second behind Sanofi (NYSE:SNY) and just ahead of GlaxoSmithKline (NYSE:GSK).


Merck's best seller, the human papillomavirus (HPV) vaccine Gardasil, far outsells its competition, Cervarix from GlaxoSmithKline, which came to the market in 2006, three years after Gardasil. In 2012, Gardasil brought in $1.63 billion, while Cervarix earned only $416.44 million.

In October 2011, ACIP (Advisory Committee on Immunization Practices) recommended the routine use of the vaccine in boys, which in part spurred a 33 percent increase in sales of Gardasil. The product was also launched in Japan, where it now has a 60 percent market share.

Merck also partnered with the GAVI Alliance to bring the HPV vaccine to the developing world. GAVI is able to purchase the recommended three-dose regimen of Gardasil for $15. GAVI Alliance is a private-public partnership that includes major governments, big pharma companies and the Bill and Melinda Gates Foundation. GAVI obtains the vaccines at a low fixed price and the other partners compensate the producers for the loss. The Alliance provides access to vaccines for millions of poor children and adults in the third world.

Resistance to vaccination

HPV is the most common sexually transmitted infection. About 20 million Americans have it, according to the U.S. Centers for Disease Control (NASDAQ:CDC). About 12,000 women get cervical cancer each year in the U.S. and 4,000 die from it, according to the American Cancer Society.

Most people infected with HPV can fight it successfully with no lasting harm. In some, however, it turns cancerous. The vaccine is more effective in younger adolescents, but it doesn't offer any protection once sexually active people contract the virus.

The government recommended years ago that all adolescent girls get a vaccine to protect against cervical cancer. But nearly seven years after it first came to market, just 35 percent of girls 13 to 17 have received a full course of the vaccine.

A recent study in the journal Pediatrics, based on CDC data, says the intent to vaccinate is declining: 44 percent of parents in 2010 said they did not intend to approve the vaccination of their child, up from 40 percent in 2008.

Part of the problem is that the human papillomavirus is transmitted by sexual contact, and parents are squeamish about vaccinating their daughters against a sex-related disease. Some public health officials suggest playing up the shot's cancer-prevention use, and playing down the sex angle. Others are looking for ways to make the shots more accessible, such as delivering the two required boosters at schools or pharmacies.

The price is also a problem. A federal inoculation program that covers vaccines for the poor and underserved gives away the HPV vaccine to clinics for free. Private insurance coverage is less reliable, and many patients have to pay high co-pays or the full price, up to $500 for a complete cycle.

Launched in 2006, Gardasil sales immediately shot to $1.5 billion in 2007 before politics and some public relations missteps by Merck itself clipped it back, and by 2010 sales fell to $988 million.

But in 2011, sales started growing again to $1.2 billion, a 22 percent increase from the previous year and in 2012 a further increase to $1.6 billion, up 33 percent.

The new health care act will require insurers to cover the vaccine, which may help a great deal to increase the vaccination rate.

Other vaccines

Besides Gardasil, Merck sells a number of other vaccines.

ProQuad is a pediatric combination vaccine to help protect against measles, mumps, rubella, and chickenpox. M-M-R II is a vaccine to help prevent measles, mumps and rubella. Varivax is a vaccine to help prevent chickenpox.

These three vaccines together brought in $1.27 billion in 2012.

The vaccine Zostavax, which hopefully will become a major source of growth for Merck, prevents herpes zoster. Thanks to good supply availability (an improvement from shortages in previous years) and a very successful direct-to-consumer campaign, it generated $651 million in 2012.

A substantial number of people over 60 should be vaccinated.

Adults are often unaware they need vaccines. Therefore Merck is planning several campaigns to promote adult immunization with Zostavax as the centerpiece. Vaccines against pneumonia, hepatitis A, hepatitis B, and others will also be encouraged.

Pneumovax, a vaccine to help prevent pneumococcal disease, had its best year ever: it brought in $580 million in revenue. This vaccine covers the 23 serotypes of pneumonia that are the most common among adults and children.

The sales figures quoted above do not include vaccine sales in Europe through Merck's joint venture with Sanofi, called Sanofi Pasteur MSD.

Since 1994 the two companies have had an equally-owned, joint venture to market vaccines in Europe and to collaborate in the development of new ones. Joint venture vaccine sales were $1.1 billion for 2012.


Vaccine V212 for the prevention of Herpes Zoster is in Phase 3 trials. Like Zostavax, this is another varicella product. The difference is that while Zostavax is a weakened live virus, V212 contains a completely inactivated form of the same antigen. It is intended for patients who are immunosuppressed and can't be safely vaccinated with a live virus product. These are usually patients with solid tumors and hematological malignancies undergoing chemotherapy. With V212, immunosuppressed patients run no risk, not even theoretical, of getting an active herpes-like infection from their shot.

Herpes and its complications are an underappreciated public health threat. The probability that someone will get shingles or worse increases about 20-fold for people who are immunosuppressed.

So the 2 million people who are at risk for this kind of infection would benefit considerably from a vaccine to protect them.

In a hospital environment, shingles is not what you would expect: a rash that is painful and sometimes damaging. Instead by spreading throughout the entire body, and then infecting the vesicles themselves, it can become a fatal condition under immunosuppressive conditions.

Merck believes their vaccine will fill an unmet need for patients whose immune competence continues to deteriorate from the growing number of chemotherapeutic agents they have to take. Filing for the approval of the vaccine is planned in 2014.

V503, an HPV vaccine for cervical cancer, is an improved version of Gardasil. It contains five more serotypes of the HPV antigen which broadens the protection from about 70% of cervical cancers to almost 90%.

Many of these serotypes are less common than the serotypes 16 and 18 contained in Gardasil, but they can be significant in certain regions of the world and in certain populations.

Separately, a recent deal with the Australian company Vaxxas may lead to a new vaccine delivery technology.

The innovative Nanopatch array consists of a 1 cm2 square of silicon with ~20,000 microprojections invisible to the naked eye on its surface. The Nanopatch array penetrates through the protective outer skin layer and targets the immune-cell rich layers just beneath the outermost skin layer using these microprojections. The result is an effective increase in immune protection leveraged with a reduction in the vaccine dose required.

Investor's summary

Merck's vaccine business grew 21 percent in 2012, although at different rates according to countries and products.

The market grew 50 percent in Japan, 37 percent in the emerging markets, and 18 percent in the US. Significant growth was experienced in the non-joint-venture European countries, as well.

What's behind the growth?

For one, no shortage in any vaccines was experienced during the year. Vaccines are inherently hard to manufacture. Every company that makes vaccines has production problems from time to time.

You are starting out with a product that is not sterile, and you have to end up with something that you are absolutely certain is sterile and safe.

Merck has invested heavily to avoid the supply problems of previous years. One billion dollars has been invested in Durham to build a very large state-of-the-art factory for containing varicella and other live virus products. The construction is under way and is on time.

Merck also has another new facility in Carlow, Ireland that is helping with the pneumococcal vaccine production. The total number of vaccine doses produced has increased by 40 percent since 2010.

2013 Guidance

Merck expects full-year 2013 revenues to be near 2012 levels on a constant currency basis. At current exchange rates, sales would be affected unfavorably by approximately 1 to 2 percent for the full year.

Merck expects 2013 non-GAAP earnings per share to be between $3.60 and $3.70.

The share price has ranged from $37.02 to $48.00 in the past 52 weeks.

The vaccine business had been one bright spot in Merck's recent history. Vaccine sales have grown substantially, but along with the sales, especially for Gardasil, skepticism and resistance to vaccination have also grown.

The coming health care changes may help the company in the sense that many of the new mandates and requirements will lend support to the vaccine industry in general and to Merck, as a major player in that business, in particular.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.