Can Merck's Pipeline Offset The Pain From Major Patent Expirations?

| About: Merck & (MRK)

The pressure on Merck's (NYSE:MRK) revenue growth is likely to continue in 2013, as the company battles multiple patent expiries and unfavorable currency movements. It is likely that there will be no respite in the near term, although the revenue declines for some of the major drugs will moderate in the latter half of 2013. Merck's best bet lies in its R&D to develop key drugs that can tap growing markets of oncology, immunology, and diabetes. There are some drugs in the pipeline and some of them seem promising, but it is too early to determine their marketability. In this analysis, we'll look at Merck's problems and what the company is doing to mitigate them.

Patent Expiration Issues Continue to Haunt Merck

Like other major pharmaceutical companies, Merck is also battling against the impact of patent expiry of its several major drugs including Singulair, Propecia, Clarinex, Maxalt, Cozaar, and Hyzaar. Out of these, asthma drug Singulair has had the biggest impact and has continually weighed on Merck's growth for the past few quarters. Worldwide sales for Singulair, a once-a-day oral medicine for chronic treatment of asthma and relief of symptoms of allergic rhinitis, stood at $5.5 billion for 2011. However, this figure declined to $3.85 billion in 2012, following the patent expiry in August same year. Merck expects that within two years following the patent expiration it will lose substantially all U.S. sales of Singulair, with most of those declines coming in the first year.

In addition to this, Merck's cardiovascular division has also been hurt by the patent cliff as its drugs Cozaar/Hyzaar, which garnered over $2 billion in revenue in 2010, lost patent exclusivity in large markets, including the U.S. and Europe in late 2010. As a result sales fell by roughly 35%, amounting to $1.3 billion in 2012. Additionally, Propecia, Clarinex, and Maxalt together accounted for roughly $1.5 billion in revenues in 2012. Due to patent expiry, we expect their combined sales to go down to about $1 billion to $1.1 billion in 2013. Another blockbuster drug is Remicade, which brought in $2 billion in revenues in 2012 but will face exclusivity loss in 2015.

Will New Alliances and Drugs in Pipeline Bring Relief?

Although Merck currently has five drugs under regulatory review, it will not be easy for it to compensate for the loss of sales due to multiple drug patent expiries. The silver lining is that the FDA had granted breakthrough status to Lambrolizumab in April, which is an investigational PD-1 specific monoclonal antibody for the treatment of advanced malignancy. Phase II clinical trials are under way, but there is still plenty of time to gauge the marketability of this drug.

The company recently announced a worldwide collaboration agreement with Pfizer to develop and commercialize its investigational SGLT2 inhibitor, Ertugliflozin, for the treatment of type 2 diabetes. With obesity on the rise, diabetes is affecting more people globally. In the U.S. alone, roughly 26 million people suffer from the condition. Owing to these factors, the global diabetes drug market has seen rapid growth rate in the last couple of years. According to GBI Research, a leading business intelligence provider, the type 2 diabetes drug market -- which constitutes a significant chunk of the total diabetes drug market -- is expected to grow from $26 billion in 2011 to $50 billion in 2021 in developed markets, including the U.S., Japan, and Europe. The company has also announced couple of agreements with Bristol-Myers and Samsung concerning Hepatitis C and biosimilars, respectively.

To add to this, Merck's stock jumped in March, as investors cheered the Data Safety Monitoring Board's recommendation that the Improve-It trial, which is being conducted to prove the efficacy and safety of Merck's blockbuster drug Vytorin, should continue until its projected deadline of September 2014. Vyotrin, which garnered $1.7 billion in revenues in 2012, is seeing dwindling sales following concerns around its safety and efficacy.

Guidance for 2013

As far as 2013 is concerned, Merck will continue to face headwinds due to patent expiry of its drugs as well as unfavorable currency movements. As a result, the company expects overall revenue decline to the order of 3% to 4% for the full year. However, in order to support the stock, the company recently announced a $15 billion share repurchase program. While Merck will continue to face issues in the near term, long-term growth can come from focus on oncology and immunology, as well as tapping the market for biosimilars.

Disclosure: No positions.

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