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Merck & Co., Inc. (MRK): Why Investors Should Be Cautious On Januvia?

 August 08, 2013 09:59 AM

In the US, Merck & Co. Inc. (NYSE: MRK) continues to expect 5 percent operational growth for the Januvia franchise. However, the target could be challenging given the current prescription trends and aggressive rebate tactics within the DPP-IV class, which limit pricing leverage.

Januvia is Merck's type-2 diabetes treatment and generated $1 billion in sales for the second quarter of 2013. A data analysis suggests that the overall US DPP-IV + Johnson & Johnson-marketed Invokana volume appears to be stable, growing at roughly 7 percent.

However, so far in the third quarter, with only three weeks of data, new Januvia franchise prescriptions are down 1.7 percent and follows a clear downward trend since the Invokana launch in April.

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"We now believe that Januvia Rx volume is likely to decline in the US starting 2H13. Overall, our analysis of the prescription data suggests that Invokana is taking volume away from Januvia, while the rest of the DPP-IV market is relatively stable," BMO Capital Markets analyst Alex Arfaei said in a client note.

The trend makes sense given that J&J is probably aggressively promoting its successful head-to-head study comparing Invokana versus Januvia showing superior A1C reductions with the higher Invokana dose and more patients achieving ADA A1C goal while losing weight.

A1C is a laboratory test that measures average blood glucose, or blood sugar, control over a period of approximately two to three months. The American Diabetes Association A1C goal is less than 7 percent.

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Meanwhile, the weekly new prescription trend also suggests Invokana is taking volume from Januvia in a relatively stable market and the downward trend in januvia nrx is alarming given that invokana is a new first-in-class product

"The Weekly total prescription (TRx) data suggests a gradually declining trend for the Januvia franchise. We now believe that Januvia TRx volume is likely to decline Y/Y in 2H13 and 2014," Arfaei said.

If Januvia can only deliver 1 percent volume growth in the second quarter of 2013 with only one new SGLT-2 inhibitor launched in April, then what will happen when Invokana is better established and when there is two more similar SGLT-2s (Empaglifolozin and Dapagliflozin) in the US market in 2014?

In March, the US Food and Drug Administration (FDA) granted the first approval for a sodium glucose co-transporter 2 (SGLT2) inhibitor to treat type-2 diabetes to Invokana. SGLT2 inhibitors prevent the re-absorption of glucose from the kidneys back into the blood, leading to increased glucose in the urine and reducing glucose levels in the blood. They also reduce weight and lower blood pressure with no increase in heart rate.

Importantly, Eli Lilly (NYSE:LLY) and partner Boehringer Ingelheim (BI) could pose a significant threat to Januvia with their fixed dose combination of Tradjenta and Empaglifolozin whose phase-3 results are expected this September with potential approval in 2014.

Finally, the aggressive rebate tactics within the DPP-IV class will likely limit Merck's ability to offset this pressure on volume with price increases.

In addition, J&J is putting significant resources behind Invokana as demonstrated by the impressive early adoption. During its second quarter earnings call, J&J said that 80 percent of patients with commercial plans now have access to Invokana in either Tier 2 or Tier 3.

"We believe the Invokana-Januvia commercial battle in the US will be a difficult one for Merck primarily because J&J has a successful head-to-head trial; that is a very powerful resource for convincing primary care physicians who manage at least 80% of diabetes patients," Arfaei noted.

In international markets, the key factor that could impact Januvia sales in the second half of 2013 and the first half of 2014 would be the forex headwinds related to the weakening yen. This assumes significance as roughly 50 percent of Januvia's international sales come from Japan. Merck's guidance is for low double-digit operational growth in International regions.

"Based on our BMO Economics forecasts, the yen is expected to depreciate roughly 22% y/y in 2H13 and 8%-13% in 1H14. Overall, we forecast that the Januvia franchise will face Fx headwinds of roughly 12%-14% in 2H13 and 6%-10% during 1H14; thus, nearly offsetting the low-double-digit growth of the franchise," Arfaei added.

Moreover, in 2014, there should be increased competition from the SGLT2s in international markets. All these points to a slower growth for Januvia.



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