Merck posts strong 2Q numbers, while building for long term

Drugmaker Merck & Co., focused heavily on its long-term future as it builds sales of crucial new medicines Keytruda for cancer and Zepatier for hepatitis C, still posted a big jump in second-quarter profit thanks to slightly higher sales and more cost cutting.

The drugmaker is transitioning to a hoped-for new growth cycle fueled by those recently launched, potential blockbuster drugs. Meanwhile, it’s trying to offset falling sales or slowing growth due to increased generic and brand-name competition for bestsellers including immune disorder drug Remicade, cholesterol drugs Zetia and Vytorin, and Type 2 diabetes drug Januvia.

The second-biggest U.S. drugmaker is countering the fiercely competitive pharmaceutical industry’s emphasis on short-term results, instead prioritizing steadily building market share in the hot categories of hepatitis C and immune system-boosting cancer drugs. Both Keytruda and Zepatier trail rival drugs that had a head start and dominate those multibillion-dollar markets.

Merck executives said Friday they’re working on catching up as they win broader insurance coverage and as continuing patient studies provide more evidence the two drugs outperform other therapies.

They hope Keytruda, being tested against 30 tumour types, will become a backbone of the new generation of more-effective treatments for numerous cancers. Merck expects to begin marketing it next month for a newly approved use, in head and neck cancer, and to soon see Keytruda being given to newly diagnosed lung cancer patients, rather than just patients who’ve failed on prior therapy. Keytruda also is approved for treating melanoma.

The Kenilworth, New Jersey, company lowered its 2016 financial forecasts slightly, citing higher costs for restructuring and write-downs in the value of some products with limited sales potential — also the result of shifting more marketing and research dollars to Keytruda and Zepatier.

Merck reported a 75 per cent jump in second-quarter net income, to $1.21 billion, or 43 cents per share. Revenue rose 1 per cent to $9.84 billion. Earnings, adjusted for one-time costs, were 93 cents per share, a penny more than analysts expected.

“This was a strong quarter. We continue to execute on our long-term innovation strategy,” CEO Kenneth Frazier told analysts on a conference.

Merck shares rose 23 cents to close at $58.66, near its 52-week high of $60.07.

Sales of prescription drugs increased 2 per cent in the quarter, to $8.7 billion. Januvia, Merck’s top seller, only rose 2 per cent, to $1.06 billion, while sales declined significantly for Vytorin, HIV drug Isentress, cancer vaccine Gardasil, allergy spray Nasonex and Remicade, which Merck sells outside the U.S.

Zepatier, launched in late January, posted sales of just $112 million. Merck is selling Zepatier at a slight discount to entrenched leader Gilead Sciences Inc.’s Harvoni and Sovaldi, which are raking in billions each quarter.

Keytruda had sales of $314 million, triple those of a year ago, but market leader Bristol-Myers Squibb reported combined sales of nearly $1.1 billion for its rival drugs, Opdivo and Yervoy.

Sales of veterinary medicines rose 7 per cent, to $898 million.

Frazier said Merck is “actively looking” for acquisitions, big or small but not overpriced, that can add to its portfolio of experimental drugs in early and mid-stage patient testing, in its core areas: cancer, hepatitis C, vaccines and drugs mainly used in hospitals.

Merck now expects full-year earnings per share of $1.98 to $2.08, excluding one-time items, down from its May forecast of $1.96 to $2.23. It expects adjusted earnings per share of $3.67 to $3.77, and revenue of $39.1 billion to $40.1 billion.

“We believe upside from new product launches such as Keytruda and Zepatier will be offset by likely declines from products such as Remicade, Januvia and Vytorin/Zetia,” Credit Suisse pharmaceuticals analyst Vamil Divan wrote in a note to investors. He maintained his “Hold” recommendation on Merck shares.


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