Biopharma investing a big exercise in "hurry up … and wait"; there's a lot of space to fill between the major pivotal clinical data releases and FDA decisions, and while earnings reports are not trivial, they don't often impact the long-term story all that much. In other words, if you liked Merck (MRK) before, there's no reason not to now (and vice versa).
Sleepy First Quarter Results
Merck reported that sales increased 1% for the first quarter as compared to the year-ago period (while falling 6% sequentially). That was a miss relative to average estimates, but less than a 1% miss. Repeating a familiar pattern, U.S. sales were stronger as a tough reimbursement environment in Europe constrains growth.
Among the individual parts and pieces, there weren't too many major surprises. Singulair was up 1%, but slightly weak, and Remicade's 31% decline was a little worse than expected. Vaccines were a little stronger than expected, and newer drugs like Januvia and Isentress both saw double-digit sales growth (26% and 15%, respectively), but here again performance was ever so slightly shy of expectations.
Where Merck stood out a bit this time around was in the expense control. Merck already has pretty good margins within the industry, and although gross margin fell more than half a point, operating income rose 3% (beating estimates).
Data Will Move The Needle
Merck investors will get some significant pipeline-related data later this year. Phase 3 data on suvorexant (insomnia) should be out mid-year, and this first-in-class drug could have a shot at becoming a blockbuster if the data supports a differentiated label. There will also be interim looks at odanacatib (osteoporosis), and this remains a somewhat controversial drug insofar as whether the data will support first-line usage.
External to Merck, Roche (RHHBY.PK) will be reporting data on its cholesterol drug dalcetrapib, and while success here would likely be a positive read on Merck's own anacetrapib, failure doesn't necessarily mean Merck's drug will fail as well. Key to this category will be what I'd call "functional data" - do the changes in HDL and so on actually lead to demonstrable improvements in cardiac events. If they do, these could be multi-billion dollar drugs down the line.
While Vytorin and Zetia Get Knocked Out Early?
Analysts and investors will also be paying attention to the initial ruling soon to come in Merck's suit against Mylan (MYL) to prevent generic versions of Vytorin and Zetia launching prior to the first expirations of patents in 2016. This is basically a binary outcome with no upside, but probably 15% earnings downside if the ruling goes against Merck.
Generic knockoffs aren't the only threat though; if data from the IMPROVE-IT study is bad enough, there's a slim chance that the drug could be pulled or (more likely) see prescriptions decline.
Staying Patient In Hep-C
Merck management has been criticized for not being a more active player in the fast-evolving next-gen hepatitis C development race. At this point, it looks like management is going to focus on maximizing the potential of Victrelis (and hoping to grab share from Vertex (VRTX), while also continuing to develop MK-5172 - which management seems to think is a very good protease inhibitor.
I suspect Merck is simply waiting to see how various drugs and combos develop before making a big splash. Gilead (GILD) jumped in a little early in buying Pharmasset and has now come under severe second-guessing. While Gilead and Bristol-Myers (BMY) look like early leaders [and Abbott (ABT)] close behind), there's still a ways to go and Merck has the resources on hand to buy or partner if an opening presents itself.
The Bottom Line
Like Glaxo (GSK), there is a large spread in the revenue that analysts project Merck will garner from its pipeline in five years' time. Pessimists see less than $3 billion in potential, while optimists go north of $7 billion. I tend to side with the optimists, but the data on anacetrapib will have a big impact on that estimate.
As I said in the intro, very little has changed about Merck in the last couple of months. I still believe it to be a significantly undervalued Big Pharma stock, but investors may well want to wait for the resolution of the Vytorin patent situation and/or more data on the pipeline before taking the plunge.