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Merck Should Handle Patent Cliff Better Than Its Peers

 February 13, 2013 10:03 AM

(By Mani) Merck & Co., Inc. (NYSE: MRK) should handle its patent cliff better than most its peers. Similar to other major pharmaceutical companies, Merck will face significant headwinds from patent expo between 2012 and 2014.

Competition from low-cost generic drugs has hurt sales of other health care giants such as Pfizer Inc. (NYSE: PFE), Eli Lilly & Co. (NYSE: LLY) and Bristol-Myers Squibb Co. (NYSE: BMY).

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Merck's best-selling drug Singulair, which treats asthma and allergies, lost U.S. patent protection in August 2012. The drug accounted for 11 percent of 2011 revenues. Fourth-quarter sales of Singulair tumbled 67 percent and anti-hypertensive drugs Cozaar and Hyzaar sales also declined 26 percent, due to the loss of market exclusivity in the U.S. and major European markets in 2010.

Merck's brain tumor treatment Temodar and Propecia, which is used to treat enlarged prostates would also see more generic competition in the coming year. Both these drugs generate a combined sales of about $1 billion.

Currently, Merck is relying on sales of other drugs such as diabetes treatment Januvia, which recorded 18 percent growth in sales to $1.13 billion in the fourth quarter.

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A broad revenue base with robust growth from its diabetes franchise and its vaccines should partly offset the impact until revenues establish a new base in 2013, and return to growth after the impact of Singulair wears off. Merck is on pace to submit five products for regulatory approval in 2013.

With a diverse pipeline, including a number of first-in-class drugs in high potential markets, Merck has significant potential growth drivers (e.g. MK-8931, a BACE inhibitor for Alzheimer's disease and MK-3102, a once weekly DPP-4 inhibitor for diabetes).

"Some of these programs are risky, but most have encouraging early data and Merck has a good record with first-in-class drugs (e.g., Januvia and Isentress)," BMO Capital Markets analyst Alex Arfaei wrote in a note to clients.

Merck also has a number of strong next generation products (e.g. Odanacatib for osteoporosis, MK-3475, a PD-1 antibody with good early activity in melanoma, and MK-5172, a once-daily, oral NS3/4A protease inhibitor for the treatment of chronic hepatitis-C). Out of these, Barclays estimate Odanacatib to generate $2 billion in annual sales by 2020.

In addition, Merck is not over dependent on any one particular pipeline drug. However, Anacetrapib for atherosclerosis and MK-8931 for Alzheimer's could be a significant revenue stream.

"We believe Merck is also managing its expenses well and will probably maintain its operating margin in the 31%-34% range despite the loss of Singulair, which had very high margins," the analyst said.

Meanwhile, Merck is strategically well aligned with the key industry macro trends as it has effectively re-allocated resources to capitalize on growth of emerging markets, and is building a cancer pipeline with a focus on immune therapy and personalized therapy. Further, it is judiciously preparing for the significant biosimilar opportunity in the second half of this decade.

Shares of Whitehouse Station, New Jersey-based Merck trade 11 times its 2013 consensus earnings estimate. Out of 21 analysts covering the Merck stock, 13 of them rate it as a "strong buy" or "buy," while 8 analysts recommend a "hold." There were no "sell" ratings on the stock, which has been trading between $36.91 and $48.00 during the past 52-weeks.



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