Merck's Pipeline Of Drugs Should Make Up For Lost Sales To Generic Competition

| About: Merck & (MRK)

Though Merck & Co (NYSE:MRK) has seen its stock rise over 18% YTD, the giant drug maker has seen some setbacks as the company has experienced a drop in drug sales due to generic competition. While some pundits see Merck's stock trading sideways until the company develops a new blockbuster, there are a number of positive happenings at Merck that make the stock attractive over the long term. In the second quarter the company has seen a rise in sales of eight of its top selling drugs; plus due to its billions of dollars the company spends yearly in research and development it also has one of the strongest pipelines of drugs in various stages of testing.


Merck spent nearly $8 billion in research and development in 2012 with a goal of developing future blockbuster drugs. Today the company has developed an extensive pipeline of 44 drugs in various stages of testing, including 6 that are under review waiting for approval from the U.S. Food and Drug Administration (FDA), and 15 in Phase III studies. However, there have been setbacks and delays, such as with the osteoporosis drug, odanacatib, which the company had hoped to file for FDA approval in the first half of 2013, but now expects to file sometime in 2014 in order to provide additional safety and efficacy data. If odanacatib does gain approval by the FDA, Barclays Capital projects peak annual sales of over $2 billion by 2020

Another promising drug that has been given "breakthrough status" in late April by the FDA is lambrolizumab (MK-3475) for the treatment of melanoma and non-small cell lung cancer. Lambrolizumab received "breakthrough status" when the FDA acknowledged that the drug was able to demonstrate major benefits over the current therapies offered for the life-threatening illnesses. Merck has four clinical studies underway for lambrolizumab for a variety of cancers, including a Phase II study for melanoma, and Phase I trials with Bristol-Myers Squibb's (NYSE:BMY) Yervoy for patients suffering from triple-negative breast cancer, metastatic bladder cancer, and head and neck cancer. Analysts at Leerink Swann estimate that lambrolizumab could generate peak sales of $450 million in just the melanoma indication by 2023.


What mostly has investors concerned is Merck's second quarter drop in sales. Sales slid 11% to $11.01 billion, due mostly to its once top asthma drug, Singulair, tumbling 80% from $1.43 billion in the second quarter 2012 to just $281 million in the second quarter 2013. Singulair was once the eleventh best-selling drug in the world; however since it went off patent last fall the drug has experienced a free fall in sales. This led to the company's second quarter earnings to fall to $906 million, or $0.30 a share, down from 2012-second quarter of $1.79 billion, or $0.58 a share. However, there is hope that some of the drugs in its pipeline will eventually offset the losses in sales from Singulair and other drugs that have gone or will go off patent.

The company did experience a rise in sales of some of its drugs, including its popular diabetes drugs-- Janumet, which grew 16% to $474 million, and Januvia, which saw sales rise a modest 1% to $1.1 billion. Januvia sales have recently felt pressure from Johnson & Johnson's (NYSE:JNJ) competing drug, Invokana , which was approved by the FDA for type 2 diabetes earlier this year. Invokana treats diabetes differently compared to many other diabetes drugs, including Januvia, by causing blood sugar to be excreted in the urine, but it may also have more serious side effects including elevated stroke risk and raising LDL (the bad cholesterol) levels.

Sales of the company's cervical cancer vaccine, Gardasil, jumped 18% on revenues of $383 million compared to $323 million in the same quarter 2012, while cholesterol lowering medicine, Zetia, rose 3% to $650 million up from $470 million in second quarter 2012. Vytorin (another cholesterol medication) sales dropped 6% to $417 million down from $445 million in 2012. Remicade, used to treat Crohn's and other inflammatory diseases, had sales growth of 2% to $527 million up from $518 million. Isentress, an HIV integrase inhibitor for use in combination with other antiretroviral agents, grew 4% to $412 million.


Merck has a market cap of $145.9 billio. The company has more than $13 billion in cash in its arsenal. Merck also announced a dividend of $0.43 per share on September 16th, representing a $1.72 dividend on an annualized basis and a yield of 3.54%. In an effort to prop up investors' value in the stock, Merck announced in mid-May that it planned to repurchase $5 billion in company stock from Goldman Sachs (NYSE:GS), which comes to roughly 99.5 million shares. Add to that the company already authorized additional purchases of up to $15 billion of its common stock and intends to buy back about $7.5 billion over the next 12 months.

On August 5th, The Street reiterated a buy rating due to its "solid financial position with reasonable debt levels." On July 31st, Zacks reissued a neutral rating and maintained its $50.00 target price. Separately, analysts at BMO Capital Markets downgraded Merck from an outperform rating to a market perform rating with a $51.00 price target on the stock. On July 12th, analysts at Jefferies Group reiterated a buy rating but lowered its target price from $56.00 per share to $54.00 per share.

Though investors should be cautious about the sales outlook and short-term growth for Merck, I think the company's outlook for the future is promising and strong. For the long term, to make up the lost revenue from generic competition, Merck does need a blockbuster drug from either its own pipeline or from a collaboration with a smaller biopharmaceutical company. Merck has plenty of cash to make such a collaboration happen if the opportunity arises. Though there are other giant pharmaceutical companies that are strong investments today, I think Merck is a solid stock to have in one's long term portfolio.

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.