Merck's New Drugs Are Bringing New Hope

Feb. 6.14 | About: Merck & (MRK)

Merck & Co., Inc. (NYSE:MRK) is the second-largest pharmaceutical company with a significant market standing around the globe. I will be discussing the future outlook of the company with regards to the stock's performance in the international stock exchange and in light of its revamp operations, new developments, and the industry.

About Merck & Co., Inc.

Merck is a US-based global pharmaceutical company that generates its revenues from four operational segments: pharmaceutical, animal health, consumer care and alliances. The pharmaceutical segment generates more than 80% of the total revenues of the company. Merck has a global network and its distribution percentages are shown below.

Source: Annual Report, 2012

As of the third quarter of 2013, 20% of the company's sales were reportedly generated from the emerging markets with strong positive growth experienced in Brazil, Korea, Russia and Turkey, and negative growth figures derived from China and Mexico.

China Becomes Challenging

Although China remained a hub for investment for pharmaceutical companies up until 2011 the growth for Western companies nosedived towards the end of 2013 plunging by as much as 20% even though the overall Chinese health industry was growing at a pace of about 25% per year. Two key reasons were determined as the reason for the revenue erosion:

  1. Intense competition faced by local Chinese pharmaceutical companies;
  2. Accusations that Western drug maker, GlaxoSmithKline (NYSE:GSK), was bribing physicians to recommend its medicines and gain an unfair advantage against local and other competitors. The accusations investigated by the Chinese regulatory agencies eroded the brand image of all Western pharmaceutical companies. Physicians now avoid contracting with the Westerners and favor locals in their stead.

Patent Rights in India are Questionable

Drug intellectual property rights are becoming increasingly threatening for global pharmaceutical companies as the Indian Government allows a domestic panel to shortlist certain drugs manufactured by global leaders and copy them to boost treatments among the citizens. As of now it is unclear as to which drugs will be shortlisted but rumors are that the panel intends to select drugs over a wide spectrum including but not limited to drugs related to HIV, diabetes, and cancer.

This has put Merck's most popular drug, Januvia that is intended for diabetic patients, under significant threat of patent violation in India. The Indian Government's efforts are targeted towards lowering health costs for its natives wherein recent research estimates that approximately 65 million Indians are diagnosed with diabetes and 2.1 million with HIV every year.

Despite the fact that the earnings of the company grew by 16.5%, as of the third quarter of 2013, the future expectation regarding earnings remains dismal due to the recent changes in the Indian environment. Due to the violation of patent rights India is becoming increasingly risky for international pharmaceutical brands who might now think twice before introducing another drug in India.

Januvia's Sales Plunge

Januvia is estimated to generate lower sales in the upcoming years and since it is the best-selling product of the company it will significantly impact the topline. Besides the uncertainty faced in India, the revenue generated by this particular drug declined by 5% YoY globally as per the results compiled in the third quarter. The decline in sales was majorly attributed to the rising competition due to patent expiration. Generic drugs and competing brands offered the same drugs at lower prices. The future outlook of the drugs remains dismal since competition is expected to increase in the next two years.

New Drug Research

In response to the patent expiries and challenging environment faced in China and India Merck is working on a number of new drugs. One such drug, MK-3475 is targeted towards the treatment of cancer melanoma that reportedly afflicts about 77,000 million Americans each year. Trial results of MK-3475 indicated that 41% of patients undergoing the trial treatment saw their tumors shrink and improved the life expectancy of the patients by as much as 81%. Based on the historical results of 77,000 million new melanoma patients per year the cancer melanoma market is expected to grow to $4.5 billion by 2020. With a higher probability to improve the life expectancy of cancer patients the drug will definitely boost the topline of the company by manifold as soon as it gets approved by the FDA.MK-3475 will most likely get FDA approval in the first half of the present year.

Besides MK-3475, a number of new drugs are moving forward in the pipeline. I have discussed this specific drug considering the huge impact it is expected to have on the earnings of the company in the very near future.

Reducing Operating Expenses

Back in October 2013, the company announced it would slash 10% of its global workforce to lower its operating costs. Although the company claimed that its efforts were focused on streamlining the operations as part of its revamp I believe that Merck slashed its workforce to boost its earnings that took a plunge when its Januvia sales figure dropped in the face of increasing competition. The company plans to bring its operating costs down by approximately $2.5 billion within the time span of two years; 40% of which will be realized by the end of 2014.The remaining reduced cost advantage is expected to be realized by the end of 2015. The earnings of the company are expected to improve as a result.

Conclusion

Despite a negative future outlook in China and India the stock price of Merck is expected to surge in the upcoming future as a number of its pipeline drugs receive FDA approval. MK-3475 alone is expected to generate earnings of approximately $3 billion according to one estimate. China and India cannot be considered zero growth markets. However, any losses that might be incurred in these two markets will be offset by the company's new drugs. With higher expected margins and a very likely price surge I would recommend investing in the stock before it gets too expensive.

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.