Merck (NYSE:MRK) recently received FDA approval for the new pediatric formulation (oral suspension) of its HIV-1 treatment drug Isentress.  The drug has already been in the market for a while and the recent approval will help the company bring additional convenience and flexibility in terms of its administration for children. While this is not a very significant development, it reinstates the company's focus on the anti-infective drugs market, which is one of the growth areas for pharmaceutical firms. Merck has struggled recently due to the impact of loss of patent exclusivity of certain key drugs and needs to focus on therapeutic areas catering to infectious diseases, cancer and diabetes. Anti-infectives constitute almost 25% to Merck's value according to our estimates.
Our current price estimate for Merck stands at $52, implying a slight premium to the market price
Isentress Is Growing Strong
Isentress is the second biggest anti-infective drug for Merck after Gardasil, and has shown healthy growth in recent quarters. For the first nine months of 2013, the drug's sales stood at over $1.2 billion, registering growth of 6% over the same period a year ago. That's not too bad for a drug that brings more than $1.5 billion a year for the company. The global growth has been steady, and Merck has maintained its share in the U.S. market. However, Gilead Sciences is the global leader in HIV medications and will continue to give tough competition to Merck. The global market for HIV drugs stood at $10.7 billion in 2010 and is expected to reach $13.2 billion by 2016. 
Gardasil Has Potential, Needs To Be Promoted More
Merck needs to make efforts to ensure that its HPV (human papillomavirus) vaccine Gardasil continues its topline growth. The Japanese government's decision to suspend proactive recommendation of HPV vaccine has impacted the drug's sales in the recent quarter. While this raises some concern, there is another issue that the company needs to tackle domestically in the U.S. The vaccination rates have been relatively low for Gardasil and other HPV vaccines. According to The Journal of American Medical Association (JAMA), only about 54% of girls received at least one dose of an HPV vaccine in 2012, with just 33% receiving the full course of three shots.  In comparison, about 85% of teens received vaccination for tetanus, diphtheria and whooping cough during the same period. This essentially indicates that Gardasil is missing out on a lot of potential customers, and could effectively increase its sales by another 60%, if steps were taken to increase the awareness about the necessity of the vaccine.
We expect Gardasil's sales to exceed $1.8 billion in 2013, up 50% from $1.2 billion in 2009. If HPV vaccination rates were to increase to the levels of other vaccines, revenues from Gardasil could jump to close to $3 billion in the next few years. This vaccine accounts for roughly 15%-20% of Merck's anti-infective division's revenues (reflected with Nasonex), which in turn constitutes roughly 23% to the company's value, according to our estimates. This implies that 5% of Merck's value can be attributed to Gardasil based on our current revenue projections. The scenario discussed above could add $1 billion in incremental revenues leading to some upside to Merck's stock. The upside will be relatively small because Merck is a large, diversified pharmaceutical company and no single drug accounts for a substantial portion of its revenues.
Disclosure: No positions.