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Summary

  • If Merck can grow its Hepatits C capabilities to attacking Gilead Sciences, which owns 80% of the market, Merck investors will be gainfully rewarded.
  • While this was not a blowout quarter for Merck, it did alleviate notions that the company is being left behind.
  • With the stock trading 20% below my prior target of $70, Merck is one of the best bargains in Big Pharma.

There has been a lot of talk about how Merck (NYSE:MRK) was falling behind in the Pfizer (NYSE:PFE) and most recently, AbbVie (NYSE:ABBV) in the race for Big Pharma supremacy. But that has never been the company's expressed focus. On more than one occasion, management has made it know that its chief priority is to become a strong player in the areas of immune-oncology.

To that end, given Merck's immuno-oncology candidate, MK-3475, the company's main rivals would be more along the lines of Bristol-Myers Squibb (NYSE:BMY) and Roche (OTCQX:RHHBY), which have already established strong market positions in oncology. The good news, though, Merck has enjoyed solid results from MK-3475, which industry experts and Merck's investors believe can become a legitimate candidate not only in advanced melanoma, but MK-3475 is believed to superior to nivolumab, the strong-selling cancer drug from Bristol-Myers.

What's more, that Merck was approaching several expiring patents, Merck management needed to demonstrate to a skittish market that it had everything under control. And on the heels of the company's first-quarter earnings results, there is clearly more work for management to do. While I have no doubt that Merck can maintain its drug kingpin status, it looks as if this process is going to take a bit longer than investors would like.

The company reported 88 cents in earnings per share, which was good enough for 9-cent beat. But investors were disappointed on the revenue number, which arrived at $10.26 billion, missing Street estimates of $10.44 billion and was down roughly 4% year over year. But I'm not sure how anyone could have been surprised by this. After all, the revenue struggle has been the fear along due to the expiring patents.

For that matter, patent expiration was broadly the cause for the revenue miss, which was impacted due to the flood of generic alternatives hitting the market. Beyond, the 2% negative effect of currency fluctuations, revenue was hit hard by (among other things) a 3% decline from top-selling drugs Singulair, Nasonex, and Zetia/Vytorin -- all of which had expiring patents. All told, these drugs contributed to an 11% revenue decline during the quarter.

But again, we knew this was coming. The pricing pressure was noticeable, particularly in the U.S. and Europe. It was nonetheless encouraging, however, that Merck was able to partially offset the declines with growth in diabetes, immunology and anti-infective drugs. Not surprisingly, with growth of 10%, Merck's immunology drug Remicade was a bright spot within that segment.

What was a surprise, however, was the 45% surge in Simponi, a drug used to batter rheumatoid arthritis. In the markets where it's available, Simponi has become the fastest growing immunology drug. And that Remicade continues to grow at all shows the power of Merck's brand, given that there is a wide array of biosimilars in certain European markets.

All told, while this was not a blowout quarter for Merck, it did alleviate notions that the company is being left behind. From my vantage point, Merck's future, particularly in terms of the company's progress in diabetes and immunology, is what investors should focus on. Taking more than a cursory look at Merck's product portfolio, I don't believe the company's pipeline is as weak as initially believed.

What's more, certainly the results from Remicade demonstrates that Merck still has several more quarters of growth from a key blockbuster. And when you combine this with management ability to ramp up spending for research and development, not to mention the advancement of MK-3475 in Phase III trial, Merck's future looks brighter than ever. And it's only a matter of time before Merck become a legitimate threat to Roche and Bristol-Myers in oncology.

And to the extent that Merck can grow its hepatitis C capabilities to attacking the likes of Gilead Sciences (NASDAQ:GILD), which owns 80% of the market, Merck investors will be the beneficiaries of their own faith in management. Note, according to Deutsche Bank, the overall market for Hepatitis C treatment could reach $20 billion by 2020. And as I've said recently, Merck has the tools to narrow that gap. With the stock trading 20% below my prior target of $70, Merck is one of the best bargains in Big Pharma.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Why Merck Is Still A Big Pharma Kingpin