In April the global health care giant Merck & Co. (NYSE:MRK), received "breakthrough therapy designation" from the U.S. Food and Drug Administration (FDA) for its investigational antibody therapy, lambrolizumab, a drug that treats patients with advanced melanoma. Lambrolizumab, which targets Programmed Cell Death protein (PD-1), disrupts the action of the immune checkpoint protein PD-1 and inhibits the ability of some cancers to evade the body's immune system. Researchers have shown that several tumor types are able to develop a "molecular camouflage" tricking the body's immune system into thinking that the cancer cells are normal cells and, therefore, the immune system allows these camouflaged cells to grow unchecked. The interaction between the immune checkpoint receptor PD-1 and its ligands represents a potentially important tumor-specific immunomodulatory mechanism. By utilizing the PD-1 pathway, a tumor cell can prevent the activation of T-cells and so may block a key step that triggers the immune system. Lambrolizumab, as an antibody therapy, is designed to disrupt the action of PD-1 and thus inhibit the ability of some cancers to evade the body's immune system.
Breakthrough therapy designation of an investigational drug is intended to expedite the development and review of the drug's planned use, alone or in combination, and is designed to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Last year's results were made available, and approximately half the patients in a Phase 1 study experienced tumor shrinkage after treatment and about 10% had no detectable cancer after treatment as assessed by imaging techniques. Some patients did however experience adverse events such as fatigue, rash, and diarrhea, which could be related to the drug's mechanism of action of unleashing the body's immune system. Merck also is studying the drug as a potential treatment for non-small cell lung cancer.
Gary Gilliland M.D., Ph.D., senior vice president and oncology franchise head of Merck Research Laboratories, commented on the FDA's decision: "We are pleased that the FDA has designated lambrolizumab a Breakthrough Therapy for patients with advanced melanoma. The FDA's decision to place lambrolizumab in a category that may enable expedited development and review is an important milestone for Merck as we advance ongoing programs in multiple cancer indications."
While Melanoma accounts for less than 5% of skin cancer cases, the disease is responsible for more than 80% of skin cancer-related deaths and 1% to 2% of all cancer deaths in the United States. It is estimated that roughly 76,690 new melanomas will be diagnosed this year, and in 2012 in the U.S. an estimated 9,180 people died from advanced melanoma. Analyst at investment bank, Leerink Swann, estimates annual U.S. sales of lambrolizumab for use in melanoma will peak at $450 million by 2023.
Lambrolizumab's breakthrough therapy designation may have come at a good time for Merck, which is facing a sales erosion due to patent expirations, including its top-selling asthma drug, Singulair. Singulair, which peaked at roughly $5 billion annually, has seen 97% of its sales wiped out by generic competition. There are also concerns about competition from Johnson & Johnson (NYSE:JNJ) and Takeda eroding sales of Merck's dipeptidyl peptidase 4 (DPP-4) inhibitors drug, Januvia, for type 2 diabetes, which has sales of $5.7 billion, but those concerns have yet to be materialized. The company also found that its cholesterol drug, Tredaptive, had failed to show benefit in preventing heart attacks, strokes, death, and other complications in heart patients. In addition, Merck will not seek U.S. approval and will stop selling Tredaptive in the dozens of other countries where it was already available. The company, however, does have a strong pipeline of drugs, including 23 in phase 2 studies, 15 in phase 3 studies, and 6 under regulatory review. Merck spends $20 billion annually on its R&D.
In February, Merck reported its fourth-quarter earnings fell 7.3% as generic competition continued to weaken pharmaceutical sales. On May 1st, Merck reported revenue of $10.70 million for the quarter, lower than consensus estimates of $11.09 million. But the company also reported $0.85 EPS for the quarter, beating consensus estimates of $0.79 by $0.06. The company's quarterly revenue was down 9% on a year-over-year basis. Merck & Co has set its FY13 guidance at $3.45-3.55 EPS.
Some analysts see a rosier picture for Merck in the future. In a research note issued to investors on Thursday May 16th, analysts at Sanford C. Bernstein gave Merck an "outperform" rating and currently have set a $49.00 price target. Barclays Capital reiterated an "overweight" rating and now has a $60.00 price target. Separately, analysts at Zacks reiterated a "neutral" and currently have set a $48.00 price target, while analysts at BMO Capital Markets reiterated an "outperform" rating and raised its target price from $47.00 per share to $51.00 per share.
There is little doubt that Merck has had some challenges lately, but its strong pipeline appears to be righting the ship. Though the company is up over 20% year over year, and it is close to its 52-week high, Merck is still a good stock to have in one's long-term portfolio. It has an excellent dividend and is on the cutting edge of novel drug products like its immunotherapy drug, lambrolizumab. However, I would like to see a dip in the stock for a better entry price before jumping in.
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. I have no business relationship with any company whose stock is mentioned in this article.