Merck: Chasing Down the $1 Billion Specialty Drug by Hiland Doolittle, Capital Cube

Pharmaceuticals Sector : Merck & Co., Inc.

Today, Merck & Co., Inc. (NYSE:MRK) closed just off the 52-week high (61.33) at 59.99, but it was not for lack of effort or headlines. Merck has been active in 2014 and seems to grab either a positive or negative headline every other day. Headlines go with the territory of being a major pharmaceutical provider in the 21st century. Between the FDA approval process and the numerous lawsuits facing the industry, it can be difficult to determine who is winning.

With Merck & Co., Inc. (NYSE:MRK) shares gaining 1.55 percent in the last 30 days and 24.54 percent this year, investors seem to be warming to MRK. The keys to pharmaceutical success remain research and the development of specialty pharmaceuticals. The challenges to release these new drugs is slowed by the FDA process but shares usually receive significant lifts when the FDA announces progress.

Challenges faced by Merck & Co., Inc.

Kenneth Frazier, Merck & Co., Inc. (NYSE:MRK) CEO since 2011, is the last in a long line of executives at Merck who mentored under former CEO and industry magnate P. Roy Vagelos. Before Vagelos retired in 1994, Merck achieved its greatest successes. The company was the biggest pharmaceutical on the planet. Before Frazier, an attorney by trade, took the reins, he met with his former boss and was charged to restore the company to greatness; no easy task. Some of the mountains Merck has faced include the reality that since 2007, no single Merck drug has generated annual sales of more than $1 billion. Share prices have floundered and with the exception of a boost from the $41 billion acquisition of Schering-Plough, performance has been stagnant. But, there is reason for optimism with a few positive releases from the FDA regarding new drugs from MRK.

Merck & Co., Inc. (NYSE:MRK), who over the last 60 years has brought more new drugs to market than any of its competitors has slipped to fifth place with new approvals over the last 10 years. Once the biggest fish in the pharmaceutical pond, Merck has begun to look like a floundering provider. If research and new specialty drugs drive the truck, Merck has been losing ground and fast. On April 29, 2014, Merck’s 1st quarter results showed a year-over-year decline of 3.8 percent as sales slumped to $10.3 billion. The downturn was attributed to patent expirations and an unfavorable foreign exchange rate.

In early May, Merck announced the sale of its consumer care business to Bayer for $14.2 billion in cash. This transaction took place at a time when pharmaceuticals were scurrying to stay ahead of expiring patents and seemed to solidify Merck.

Of late, the news has been more favorable for Merck & Co., Inc. (NYSE:MRK) and investors are responding in kind. Despite a September 9 report that a judge in Pennsylvania refused to dismiss two lawsuits regarding the failure of the company’s proprietary vaccine for mumps prevention, new announcements from the FDA appear promising.

On September 2, 2014, a new survey from Axxiom Consulting reported that more than half of global sales for animal health products, feed and diagnostics were generated in the Kansas City Animal Health Corridor, where Merck is a major player.  The corridor generated more than $88.2 billion in sales last year and Merck has benefited from this market.

Reasons for Optimism on Merck

Capital Cube’s news releases include an important announcement made September 4th when the FDA announced approval of Keytruda as the first cancer drug in the US to treat melanoma. The drug is to be taken in 2 mg/hg does every three weeks as a treatment form unresectable or metastatic melanoma. The drug is hailed as a major breakthrough in the fight against cancer and should be a big winner for Merck. On September 5th, the news broke that the cost of Keytruda will be $12,500 per patient per month. At $150,000 per year per patient, Merck may have some pricing challenges but cost has a way of responding to market conditions.

Also on September 4th, Merck received more good news from the FDA when the company’s investigational beta-lactamase inhibitor, Relebactam, was approved as a Qualified Infectious Disease Product (QIDP) on the FDA’s Fast Track Status. Under the Generating Antibiotic Incentives Now Act (GAIN), this urinary tract drug could get to market and be in use on an expedited basis. Phase 3 research will commence in 2015. Relebactam has passed Phase 2 testing with outstanding results and is sure to be a huge seller when coming to market. One of these drugs could be the $1 billion specialty drug Merck’s recent portfolio has lacked.

On September 8, 2014, Merck shares hit a 52-week high of 61.33 or 37 percent above the 52-week low of 44.62. The Capital Cube news trail also points out that on September 10th Merck had made significant progress resolving the manufacturing problem that disrupted the flow of the BCG vaccine. Merck received a request from the FDA to step up shipments of the drug after a manufacturing slowdown at the Sanofi Pasteur facility. Over the last two years, Merck manufacture of BCG has increased by 100 percent.

On the development side, Merck & Co., Inc. (NYSE:MRK) is positioned to rebound and investors seem to be responding to the recent good news. However, Merck’s inconsistent performance from dividends to sales to weaker than expected margins might dim enthusiasm. As Capital Cube notes, over the last five years, the dividend quality trend has been solid for 4 years but subpar for one year. This does not compare favorably with Johnson & Johnson (NYSE:JNJ), a company with much stronger growth expectations than Merck.

But, one of Merck & Co., Inc. (NYSE:MRK)’s biggest challenges is in restoring investor confidence in its products and its business operations. If we compare Capital Cube’s assessment of MRK’s sustainability of returns to Johnson & Johnson (NYSE:JNJ), we can see that MRK has a long way to go.

Merck vs JNJ