Merck Needs Acquisitions: Here’s The List

Merck (MRK) has had some success in overcoming the August 2012 patent loss of its $6 billion-a-year Singulair asthma drug with its Januvia diabetes franchise. Nonetheless, with forward sales likely to remain under pressure, due in part to multi-source generic competition against another 16% of its revenue base, the drug maker is bolstering its oncology franchise. In particular, look for Merck to acquire or invest in biotech firms developing immunotherapy therapy-driven platforms.

MRK Sales Estimates for Current and Next Fiscal Year Chart

MRK Sales Estimates for Current and Next Fiscal Year data by YCharts

Merck’s migraine drug Maxalt, which generated $491 million in U.S. sales last year, lost patent protection in December. Additionally, the $1.3 billion nasal allergy-spray Nasonex will lose market exclusivity come 2014.

Echoing the pipeline shortfall of other big pharma companies, Merck is also dealing with regulatory delays –the FDA wants more safety data on its osteoporosis drug odanacatib and insomnia med suvorexant – and R&D setbacks (including recent decisions to terminate development of promising meds for cholesterol and Parkinson's disease).

To date, Merck has been but a bit player in oncology markets, deriving only 3% of revenue in its first quarter of 2013 from cancer-related drugs. Its $1.0 billion brain tumor and melanoma treatment Temodar will face generic encroachment next year; and, European regulators and their U.S. counterparts at the FDA refused to approve the mTOR inhibitor ridaforolimus for the maintenance treatment of patients with soft tissue sarcoma or primary malignant bone tumor, citing safety concerns.

One bright spot for Merck is the investigational humanized anti-PD-1 monoclonal IgG4 antibody lambrolizumab, which works by inhibiting a regulatory checkpoint receptor found on T-cells called programmed death (PD-1). Tumors produce a protein called PD-L (L is for ligand), which can bind to PD-1 and make the cancer cells “invisible” to the T-cells. By blocking PD-1, Merck’s lambrolizumab “uncloaks” the dividing cancer cells, making them more sensitive to attack by autologous T-cells.

In patients with advanced melanoma, including those who had disease progression with prior exposure to other immunotherapy strategies, treatment with lambrolizumab resulted in a high rate of sustained tumor regression, with mostly mild side effects, according to results presented at the 2013 American Society of Clinical Oncology (ASCO) Annual Meeting and published online by the New England Journal of Medicine.

In April, the drug received a breakthrough therapy designation from the FDA, which principally means it can be eligible for the accelerated approval pathway. Merck plans to initiate late-stage clinical trials of lambrolizumab in advanced melanoma, and non-small cell lung cancer in the third quarter of 2013. Approval is likely sometime in 2015.

Analysts at JP Morgan Chase (JPM) view Merck as a drug maker to watch in the PD-1 class, opining that monotherapy use in advanced melanoma and gradual adoption in other tumor types (such as, non-small cell lung, bladder and certain types of breast cancer) could contribute $1.5 billion in sales by 2020. By their math, too, each additional $1 billion of lambrolizumab revenue would translate to incremental earnings of $0.22 in 2020 EPS.

The market for immunotherapies is mouth-watering: Citigroup (C) research analyst Andrew Baum expects such therapies to form the backbone of treatments for up to 60 percent of cancers over the next decade, up from less than 3 percent today. He estimates, too, that such targeted therapies could eventually generate peak annual sales of $35 billion. Ergo, expect Merck to source external innovations to accelerate sales and earnings growth in coming years.

Unfortunately, license costs and acquisition prices to partner or purchase biotech companies owning late-stage immunotherapy prospects or products already generating commercial revenue entail significant premiums these days: On Monday, Onyx Pharmaceuticals (ONXX) announced it was for sale. Although the company posted anemic revenue of just $362 million in 2012 – mostly due to licensing fees for its liver and cancer drug Nexavar, and the stomach cancer agent Stivarga – its market cap soared 51% to $9.5 billion on the news. As Onyx owns the global rights to the blood cancer drug Krypolis (which analysts estimate will reach peak annual sales of $3 billion) and a promising treatment for breast cancer, the San Francisco-based biotech could ultimately fetch up to $12 billion in an all-out bidding war between deep-pocketed oncology leaders, such as Amgen (AMGN ), Pfizer (PFE), or Celgene (CELG).

Onyx’s deliberations couldn’t have come at a worse time for Merck as it looks to expand its oncology portfolio. As shown in the following YChart, other biotech firms with promising cancer-fighting technologies, such as Isis Pharmaceuticals (ISIS) and Immunomedics (IMMU) are also selling at significant premiums to existing fundamentals.


ONXX EV / EBITDA TTM data by YCharts

Given research setbacks and the known quantity that lambrolizumab is unlikely to receive approval prior to 2015, merger and acquisition activity will be critical to Merck’s pipeline expansion strategy and subsequent sales growth objectives in the next decade. Though the company has ample liquidity – with $16 billion in available cash and short term investments, free cash flow of $8.2 billion (trailing twelve months), and manageable debt–to-equity ratio of 0.31 times – some $6 billion in debt will need to be refinanced through 2015. Additionally, as Merck is looking to keep investors happy with its $1.72 per share dividend and an expanded stock buyback program, the company is unlikely to get involved in a premium bidding war for the likes of an Onyx.

Nonetheless, there are several biotech concerns with more reasonable valuations that could prove attractive to management – companies with first-in-class, late- stage immunotherapy candidates. In addition, Merck could reduce internal R&D expenses by in-licensing or outright acquisition of similarly-minded concerns:

ECYT Market Cap Chart

ECYT Market Cap data by YCharts

Merck has already licensed vintafolide, a small molecule drug conjugate (SMDC) that delivers chemotherapy directly to cancer cells by targeting the folate receptor expressed on cancer cells (but not on most normal cells) from Endocyte (ECYT) in a deal worth up to $1 billion. The SMDC is under review in the EU for platinum-resistant ovarian cancer. As 80-90 percent of ovarian and lung cancers express the receptor, it is possible the drug payload could prove efficacious in other cancer indications, too. According to industry observers, the ovarian cancer drug market is projected to be around $2.3 billion by 2020, while the non-small-cell lung cancer drug market should reach $6.9 billion by 2019. You can initiate financial research on potential Merck acquisitions on YCharts.

Vical (VICL) is developing Allovectin, a first-in-class investigational DNA-based immunotherapeutic designed to stimulate both innate and adaptive immune responses in local tumors and distal metastases. Of unique interest to Merck is that this immunotherapy is currently being evaluated in late-stage clinical trials as first-line treatment for Stage III and IV melanoma. Merck watchers might want to know, too, that Vical’s current CEO, Vijay Samant, previously spent 20 years with Merck in international sales and marketing.

Developing first-to-market products is not sufficient in and of itself for a successful launch and sustainable growth. Commercialization prospects also necessitate fielding an experienced oncology sales force. Either Merck will need to sign a co-marketing deal with an oncology heavy-hitter, such as Roche Holding AG (RHHBY), or it should look to buy a struggling oncology company to develop the requisite organizational perspective. Given Roche and other big oncology players are also developing PD candidates, Merck might take a look at Dendreon (DNDN), which despite receiving positive reviews from the FDA and European regulators for its advanced prostate cancer therapy Provenge, has lost more than 60% in value in the past 1.5 years due to marketing missteps of this unique immunotherapy.

David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at You can also request a demonstration of YCharts Platinum.



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