In the near future, Merck (MRK) will have to deal with a problem that is common to almost all large pharmaceutical companies- the patent cliff problem.
The problem exist because, most drugs lose their patent exclusivity after 20 years, at which time generic drug makers can begin to sell their own versions of established drugs at much cheaper prices. The loss of patent exclusivity has plagued other large pharmaceutical companies such as Pfizer (PFE) which recently lost its patent exclusivity for Lipitor, AstraZeneca (AZN) which recently lost its patent exclusivity for Seroquel, Sanofi (SNY) which recently lost its patent exclusivity for Plavix and Forest Laboratories (FRX), which recently lost its patent its patent exclusivity for Lexapro. Bristol-Myers Squibb (BMY), which recently lost Zyprexa and Eli Lilly (LLY), which recently lost Olanzapine, have also lost revenues from drugs that have reached their patent expiration dates.
Merck is likely to see a big loss in revenues from its blockbuster drug Singulair, which will lose its patent exclusivity in the United States on August 13, 2012. Singulair which treats asthma and allergies, had revenues of $1.34 billion in the first quarter.
Merck's biggest near term challenge will be to replace the revenues that it will lose when Singulair loses its patent exclusivity. Merck has five new products in its pipeline, that could go a long ways towards replacing the revenues that it will lose from the patent expiration of Singulair. In the first quarter earnings call, Merck's President and CEO Kenneth Frazier said, "we remain on-track for our 5 major filings between now and the end of next year".
The five new drugs are Suvorexant, which treats insomnia, Bridon, which is a neuromuscular reversal agent, V503, which prevents HPV associated cancers, Tredaptive, which is a cholesterol medicine, and Endocyte, which is a late stage oncology medicine. It is extremely important for Merck to get regulatory approval of these medicines because "In the latest quarter pharmaceuticals (including human vaccines) provided 86% of revenues but grew only 3%." Merck's other two divisions are smaller but were able to grow revenues at a much faster rate.
Merck's consumer care division which features well known brand names such as Dr. Scholl's and Coppertone grew revenues by (7%), while its animal health division grew revenues at a rate of 8%. Merck has one product that will help grow revenues, and that received FDA approval earlier this year (Janumet XR). "JANUMET XR, is a new treatment for type-2 diabetes that combines JANUVIA with extended-release metformin." Merck's President of Global Human Health Adam Schecter said, "JANUVIA and JANUMET which continue to have strong performance, growing 26% to $1.3 billion this quarter." Januvia and Janumet are new drugs that have the potential to generate even larger amounts of revenue. Merck also has other relatively new products such as ISENTRESS, GARDASIL, ZOSTAVAX and VICTRELIS which are growing revenues and have long term patent exclusivity.
Despite the impending loss of the patent exclusivity for Singulair, Merck's executives seem to be relatively upbeat. They point out that "Singulair will retain exclusivity in the major European markets until February of 2013 and in Japan until 2016." Merck's President and CEO Kenneth Frazier said that "we believe the growth momentum of our underlying business and the strength of our late stage pipeline position us well as we prepare for the Singulair patent expiry and beyond." He also said that "In 2012, we intend to maintain our revenues at or near 2011 level on a constant currency basis and drive bottom line growth."
Apparently, investors believe in Mr. Frazier, and in Merck's drug pipeline, because the stock price has increased by 10% over the last year. I think that Merck's dividend ($1.68 with a 4.5% yield) may also have had a positive influence on the stock price.
It may seem speculative to invest in a company whose future is largely dependent on the acceptance of new and unproven pharmaceutical products. However, I think that investors will be willing to take a chance on Merck, because of its history of inventing winning new products, and its recent stock performance (up by 62.5% over the last three years).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.