AIDS continues to afflict many around the globe every year, and this has led to another push for better treatments to enter developing countries. This may sound like good news for companies like Merck & Co Inc. (MRK), which is making efforts to improve its antiretroviral offerings, but it might not be. For assistance in developing countries, the U.S. is approving drugs that cannot be approved in the U.S. due to patents and marketing exclusivity. These are finally safe and of high-quality furthermore, as the Food and Drug Administration (FDA) has been in charge of approving the large number of antiretroviral drugs. This initiative will make generic competition significant in Merck's HIV space, and it will add to the problems it is already facing due to patent loss.
Merck has largely been on the rise since the early part of August 2011, and it is currently trading around $43. It has 1.30% revenue growth, a 5.18% earnings yield, and $2.24 in earnings per share (TTM). Merck has recently been making a lot of moves to expand its place in the HIV treatment industry. It signed two licensing agreements for investigational HIV drugs - one with Chimerix and another with Yamasa.
With Chimera, Merck gets an exclusive worldwide license for the drug MCX157. It will also be in charge of developing the drug and commercializing it. With Yamasa, Merck will develop EFdA, which may be effective for highly resistant strains of HIV. In September, Merck will also investigate its own HIV drug MK-1439 to test its safety, tolerability, and efficacy. All of this shows a major push from the company to focus even more on its HIV offerings.
While Merck needs a way to deal with the upcoming patent expiration of its allergy and asthma medication Singulair, this does not seem to be a good way to do it.
Secretary of State Hillary Clinton pledged that the U.S. will provide more funding to help fight AIDS in developing countries. The U.S. government is currently funding for roughly 4.5 million people to receive treatment in these countries, but the goal set by President Obama is to reach 6 million people by the end of 2013. This would clearly be good news for Merck if the HIV treatment market had not become so saturated with competition.
Generic drugs have been allowed in developing countries through the U.S. President's Emergency Plan for AIDS Relief (PEPFAR), which was begun in 2003. Even if they would not be approved in the U.S. due to patents and market exclusivity, drugs may still be allowed in developing countries through PEPFAR. Recently, however, the drugs have come under scrutiny from the FDA, as substandard and counterfeit products were making their way into these countries. This led the FDA to approve or tentatively approve 152 antiretroviral drugs that will be included in PEPFAR. This assures that the generic drugs meet conditions for safety and quality. No longer will substandard products be an issue, so generic competition will be a major factor in developing countries.
Unfortunately, generics only come in a few forms, so this has led to greater drug resistance in parts of Africa. This may seem like an opening, but there is not much incentive for companies to invest great amounts of money to fill this need for new drugs that the virus is not resistant to. As soon as it is possible, generics will come out and take away business through PEPFAR. Patents do not mean very much with this initiative, so this will not be a great help to companies like Merck that will need to recover after losing exclusivity to a major product like Singulair.
Merck is not the only major company looking into this industry furthermore, so even when ignoring PEPFAR, Merck is putting too much focus on a market that is saturated with competitors. Gilead Sciences, Inc. (GILD) and Bristol-Myers Squibb (BMY) were amongst the companies providing drugs for a study on transmitting infection. It showed that these drugs helped prevent transmission to one's partner, and it also showed that they were most effective when treatment began immediately. Immunomedics, Inc. (IMMU) is developing a new drug with Karolinska Institutet. This is a new class of HIV drugs, and it may be able to actually get rid of the virus. These companies are just a few that will pose competition to Merck.
Life Technologies Corporation (LIFE) will actually benefit directly from the increased need for HIV drugs in Africa, as it will collaborate with SATuRN to improve HIV testing. The test will be available on Life's Applied Biosystems line of Sanger sequencing instruments. Since these instruments are already present in a good number of African hospitals, Life and SATuRN will be in a good position to benefit from the push for better treatment. This will not benefit Merck or the other competitors I have listed, however, as generic competition is so massive in developing countries.
Life has been trading around $46 - up 10% since the beginning of the summer. Its revenue growth is 4.82%, and its earnings yield is 5.40%. Unlike the others, this company is in a good place to benefit from the increased attention being placed on HIV in developing countries, so it may definitely a stock to consider.
Merck falls in with the group of stocks that cannot really benefit from the push for HIV treatment in Africa. While more government funding is a good thing in general, this is largely focusing on generic competitors that could not even compete in the U.S. due to patents and market exclusivity. Even if Merck pushes through and makes a major breakthrough, it will not enjoy a strong position for very long. When an industry has 152 approved drugs circulating, it is likely the cheapest one that will continue to win. LIFE may be the biggest winner here, if there is a winner. One thing I can say, Merck likely won't do investors any favors by committing to a push here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.