Merck KGaA: Another Stumble Leaves Investors Worried

Includes: MKGAY, NVS
by: EP Vantage

It was the kind of news that Merck KGaA (OTCPK:MKGAY) could have done without following its failure last week to get European approval for Erbitux in lung cancer. As such, the bombshell that the FDA had issued a refuse to file letter in response to the marketing application for oral MS drug, Movectro (cladribine), predictably caused shares in the German group to head southward yesterday, aided by a slew of analyst downgrades.

The FDA’s decision appears to point to a problem with the data that Merck has submitted to the US watchdog. At the moment, it is unclear whether the group had not supplied enough data or if the data it had used were not acceptable for whatever reason. What it also means is that Merck has now fallen behind in the race to launch the first oral MS pill, potentially leaving the door wide open for Novartis’ (NYSE:NVS) FTY720 (fingolimod) to get to market ahead of cladribine (Novartis' FTY720 fights back in race for first oral MS pill, September 30, 2009).

Attention to detail

This administrative failure on the part of Merck must be galling for investors who might have justifiably been more worried about the regulator potentially pulling the drug up on its safety or efficacy record much further down the line.

Coming so close on the heels of the disappointment of the second refusal for Erbitux in lung cancer, this slip up will leave Merck wide open to the criticism that the group’s regulatory affairs division is not performing as it should and that management may have taken their eye off the ball of this vital function (Second Erbitux rebuff slams door on lung cancer approval in Europe, November 23, 2009).

Merck now faces a fast ticking clock to try and salvage the situation given that FTY720 is expected to be filed in the next few weeks and, as such, could get approval by the third quarter of 2010, something that Merck had been hoping to achieve in the first half with its fast track designation.

Falling forecasts

Forecasts for the drug are now almost certain to come down. Consensus sales for Cladribine had over the last six months managed to creep ahead of FTY720, with expectations for 2012 sales jumping from $267 million to $766 million. This, compared with a huge fall in the same period for FTY720, with 2012 sales forecasts dropping from $575 million to $176 million as the market started to believe that cladribine would be first to market.

Alongside downgrades, the delay to cladribine will also mean that analysts will be able to compare the two year safety data for FTY720 with the two-year data released by Merck in April of this year that showed strong efficacy for cladribine, but serious side effects including lymphopenia, abnormally low levels of lymphocytes. FTY720 is, however, not without its problems, and the drug has been struggling with serious adverse events including higher incidences of skin cancer and deaths from herpes infections (Safety concerns take the shine off promising oral MS drugs, April 30, 2009).

If the results of the two studies are similar then Merck will have lost one major advantage, that of being on the market first. However, the drug could still win share given its more favourable dosing regimen that could see the pill being given only 10 times a year compared with the once-daily administration of FTY720.

The serious side effects for both these oral treatments have, though, caused analysts and observers to now assume that they will be used in a second line setting when other more benign treatments have failed. The drugs are also highly likely to be subject to very intense risk evaluation and safety monitoring programs if they are approved.

Analysts have wasted no time in trimming their share price targets on the back of the news with the likes of Commerzbank leading the downgrades with a reduction of €72 to €64 and BoA Merrill Lynch being almost as hard with a fall from €71 to €67. Merck will now be working to rapidly get its filing back on track, if it manages this and reports no more regulatory setbacks in the coming months then these targets could once again start to drift upwards.