Will Merck Be Able To Reward Its Shareholders?

Nov. 9.13 | About: Merck & (MRK)

Merck &Co, Inc. (NYSE:MRK) continues to experience weakened performance as evident in the release of its third quarter results. The company's revenues declined by 4% and its earnings decreased by 35%compared to the third quarter results of 2012.

The company's weak performance is attributed to the loss of exclusivity of its mega revenue driver Singulair whose sales declined by 53% due to generic competition. The weak performance can also be attributed to increased competition for its top selling drug Januvia. These events have forced the company to lower its full year EPS guidance as well. Over the period of twelve months Merck has been significantly outperformed by its peers.

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Source: Y-Charts

In my article, I will analyze Merck's revenue drivers, growth prospects and the company's pipeline in order to determine whether or not the company will be able to improve its performance.

The Company's Challenges

Patent expiration and competition from other players in the industry are the key challenges that Merck is facing. The company has reported a 4% decline in the revenues of its pharmaceutical segment. This decline was driven by a 53% decrease in the sales of its bestselling drug Singulair because of intense competition from the lower-priced generic products. Singulair contributed $5.5 billion annually until its patents expired in 2012. The decline in the company's revenues is also attributed to a 5% decline in the sales of the type-2 diabetes treatment drug Januvia. This drug accounts for almost 10% of the total revenues of the company.

The US DPP-4 prescription data which is essential for the Dipeptidyl peptidase-4 inhibitor drug used in the treatment of type-2 diabetes reveals that Januvia was losing sales in the US. Three weeks prescription data for the third quarter revealed that Januvia's franchise prescriptions declined by 1.7%. The number of prescriptions written for Januvia declined because of the increased competition from the launch of Invokana by Johnson & Johnson (NYSE:JNJ) which took a significant share of the type-2 diabetes market during the most recently ended quarter.

Invokana is taking shares away from Januvia while the rest of the type-2 diabetes market is stable because Johnson & Johnson is aggressively promoting studies to show that Invokana is more effective than Januvia. Invokana has reported significant A1C reduction and more patients achieved their ADA A1C goal by losing weight in comparison to those on the Januvia regimen. Januvia generated $4 billion in sales for the company in 2012. The decline in the sales of Januvia is expected to continue because Januvia is also facing competition from the Bristol-Myers (NYSE:BMY) drug Onglyza and the Eli Lilly drug Tradjenta. This would severely impact the company because it relies heavily on this single drug.

Can the Merck Pipeline Overcome its Current Challenges?

In order to fuel the future growth of the company and offset the decline in revenues resulting from the loss of exclusivity of its bestselling drugs, the company should ensure it has a very strong pipeline with late stage blockbusters in order to boost the company's revenues. Let us examine Merck's pipeline to determine whether or not it is able to offset the revenue decline from patent expirations and fuel future growth.

Recently, Merck has released the phase 1B results of its Lambrolizumab (MK-3475) drug for the treatment of non-small cell lung cancer. This drug has triggered a positive response in 24% of the treated lung cancer patients. The results from the 38 patients whose cancer had stopped responding to earlier rounds of treatment showed that 24% of these patients had an immune system response to this drug and that 21%of patients also experienced tumor shrinkage. The company believes that ongoing Phase 2 trials of this drug would provide enough positive response to receive approval from the FDA.

This drug would position Merck as a direct competitor of Bristol-Myers who also recently announced the results of the Phase 1 trial of its non-small cell lung cancer drug called Nivolumab. Bristol-Myersalso received positive results in the form of increased patient survival periods.

Bristol-Myer's combination of Nivolumab and Yervoy produced a 53% response rate in patients and places Bristol-Myer in direct competition with Merck's Lambrolizumab. Roche (OTCQX:RHHBY) is also making strides in cancer therapy. Though Lambrolizumab would be a bestseller for Merck. I don't think it would be able to generate enough revenue to offset the decline in revenue from the patent expiration of its previous bestsellers. Therefore I am forced to believe that the company has a dry pipeline.

Will Merck be Able to Reward its Shareholders?

Over the period of a decade Merck has not rewarded its shareholders with any significant capital gain. In 2004 shares of the company were trading at $25 and by the end of 2007 the price of shares reached$60. The price fell to $25 and currently shares are trading at $46. Investors have been totally reliant upon dividends for their return. Currently the company is paying a dividend yield of 3.7% and has a payout ratio of almost 100%. Keeping in mind the payout ratio and the company's current situation I don't think the company will be able to either increase or sustain its dividend payments.


Merck has been struggling to protect the sales of its patent-protected drugs and is also facing issues related to patent expirations. In light of my analysis, I do not think that Merck will be able to recover because its pipeline is unable to fuel future growth and offset the decline in the company's revenues.

Although, the dividend yield of the company appears appealing due to the high payout ratio. However, due to declining revenues the company would not be able to either increase or sustain its dividend payments. Therefore, I would not recommend buying the stock.

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.