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Merck (MRK)Stock (Drug Manufacturers Industry, Drug Manufacturers - Major Industry, Pharma & Healthcare Industry)
 Merck & Co. (NYSE:MRK) is the seventh largest pharmaceutical company in the world with annual sales of $24.2 billion. While Merck produces a wide assortment of medications, a few blockbuster drugs bring in the bulk of its revenue. Currently Merck's four most profitable drugs account for more than half of total sales. As a research-driven drugmaker, significant resources are devoted to continue to produce new drugs. Notably, there are high expectations for HPV vaccine Gardasil and diabetes drug Januvia. As of the end of 2007, there are 17 products in Phase II clinical trials that may be marketed in the next five years. The cholesterol drug Vytorin was previously hailed as a blockbuster but studies have cast doubt on its benefit. Vytorin is jointly developed with Schering-Plough, and both companies face lawsuits for misleading marketing techniques that claimed Vytorin was more effective. Prescriptions have fell by 9 percent in the second quarter of 2008.[1] Merck faces many of the challenges that face all pharmaceutical companies, including issues surrounding patent expiration and FDA approval. Patent expiration may affect 30% of sales through 2008. In addition, there is growing pressure in the US and abroad to lower the price of medication.
[edit] Corporate Overview[edit] Company HistoryMerck & Co. was initially formed in 1891 as a United States subsidiary of the German chemicals and pharmaceutical company Merck KGaA. During World War I, it was established as an independent company from confiscated assets. Since then, it has grown to become one of the top seven largest pharmaceutical and biotech companies worldwide. Merck KGaA continues to operate to this day, and is not related to Merck & Co. [edit] Business GrowthMerck reported a second quarter net income of $1.09 billion, down 28.7% from $1.53 billion a year ago. This drop came largely due to a $612 million restructuring cost. Net revenue was down 2% to $5.9 billion despite favorable exchange rates providing a 4% increase in foreign sales. Sales of cholesterol drugs Vytorin and Zetia continued to decline, each down 15% . The company will cut 7,200 jobs (60% of which are foreign), which accounts for almost 13% of their workforce, in an effort to increase profitability. [2] Merck and partner Schering-Plough announced that Vytorin was not effective in preventing aortic stenosis, or blockage of the heart valve. Patients taking Vytorin also showed slightly higher rates of cancer, but the two companies has called that an anomaly.[3] On February 8, 2008, Merck paid $650 million to settle a Medicaid overcharges case. The law requires pharmaceutical companies to sell drugs to the Medicaid program at the lowest available price. Federal investigators accused Merck of using a loophole in the Medicaid policy to sell the drugs to hospitals at deeper discounts. This settlement does not admit wrong-doing, and is not expected to affect revenue since the company had taken a $670 million charge last year in anticipation of the settlement. On April 29, 2008, the FDA issued issued a not-approvable letter for Merck's experimental cholesterol drug, which it planned to call Cordaptive. Investors had high hopes for the drug, which would be one of the first drugs to increase "good cholesterol" (HDL). Stocks fell by 10.8 percent after the news, which came as a surprise. A week after the this announcement, the company reported that it will cut 1,200 sales positions, or about 15% of its U.S. sales force. On September 10, 2008, the U.S. Justice Department informed Merck that they would be investigating whether the company made false claims to federal health care programs about the effectiveness of Vytorin. If found guilty, the company could be forced to return revenue from the drug made from the programs. A team of 35 state attorneys are also investigating the possibility of consumer protection law violation by the company concerning the marketing of the drug. [4] On November 8, 2008, Merck announced their continued commitment to research of heart disease, cholesterol, and hypertension drugs, shortly after Pfizer announced plans to leave this field in favor of cancer drugs. Pfizer cited the increased regulation and cost of research for heart drugs, but Merck insists on both the market strength (heart disease drugs contributed to 29% of the companies revenues in 2007). [5] [edit] Business DriversThe main drivers in the pharmaceutical industry include product pipeline (new products in development), patent expiration (products becoming generic), and product diversification. The combination of these factors determine profits and forecasts, and are therefore very important in making investment decisions. [edit] Product PipelineMerck currently has 17 products past preliminary clinical trials (Phase II and III), meaning that there should be a steady stream of new releases in the coming years. In 2007, Merck spent $4.9 billion on research and development. [edit] Lack of Product DiversityAlthough Merck has a wide assortment of drugs and vaccines, it depends on a small number of highly successful blockbuster drugs. For example, in 2007 the four most profitable drugs brought in more than half of the company's revenue. Thus, the success of each of its blockbuster drugs has a large impact on the overall health of the company. The future success of these four drugs will also depend on patent expiration dates. For more information on specific drugs, see the following section, Major Drugs and Industry Trends. [edit] Patent expirations
Due to Food and Drug Administration (FDA) regulations, pharmaceutical patents last 17 years, during which a pharmaceutical company has an exclusive right to manufacture a particular drug. After the patent expires, generic versions of the product can be produced and sold by competitors. Generic medication is cheaper than brand medication, and the lower cost is often a strong incentive for consumers to choose generic over brands. In addition, the presence of a generic alternative may prompt a decrease in the brand name medication price. 30% of Merck's sales through 2008 may be affected by generics due to patent expirations. The patent for the cholesterol drug Zocor expired during 2006, and Merck experienced a significant decline in sales. Merck will have major setbacks in patent expiration in the coming years, including the very profitable osteoporosis drug Fosamax, for which the US patent will expire in 2008. However, the Europe patent office has extended the Fosamax patent through 2018. [edit] LitigationPharmaceuticals can face significant liabilities if a medication is later found to be defective or produce adverse reactions. Even though such adverse reactions are previously unknown and impossible to predict, damages claimed in such lawsuits are usually substantial. Depending on jurisdiction, the legal system may limit allowable damages. Vioxx is an anti-arthritis drug that gained widespread adoption for treating chronic pain. Up to 80 million patients were prescribed with Vioxx. Soon after approval, several studies indicated that Vioxx increased the risk of heart attack over the placebo. Merck recalled the drug, but has faced several thousand lawsuits from patients who took the drug. On November 9, 2007 Merck agreed to pay $4.85 billion to settle 27,000 claims that Vioxx caused heart attacks and strokes in thousands of users. Now Merck investors must wait and see whether the Vioxx plaintiffs will accept the settlement.[6] If accepted, Merck will be able to eliminate Vioxx-related legal costs that total to over $600 million annually. While the settlement is one of the largest in history, it is significantly smaller than analysts' initial liability estimates of $10 to $25 billion. On May 29, a Texas court did not find Merck to be responsible for the death of the plaintiffs husband, reversing a $26.1 million decision against Merck. This follows two weeks after another Texas ruling worth $7.75 million in favor of Merck. In a separate case, a New Jersey court sided with Merck, saving the company $4.5 million in punitive damages. While these cases represent only a small fraction of the thousands that Merck still faces, the pattern of favorable rulings is a good sign for the company. On November 30, Fosamax patients filed a class-action suit against Merck, claiming that the osteoporosis drug caused dental damage. Potential damages or litigation costs are yet unclear. Vytorin is a cholesterol drug jointly developed with Schering-Plough that is a combination of Merck's best-selling Zocor, which had lost patent protection in 2006, and Zetia, a newer drug. While sales of the drug are strong, totaling $3 billion in the fourth quarter, Vytorin has faced controversy over its comparative efficacy and marketing techniques. As a combination drug, Vytorin enjoys patent protection, which allows Merck and Schering-Plough to charge significantly higher prices than its Zocor counterpart. However, the two companies recently released the results of a study that showed Vytorin may not be any more effective than Zocor alone. While the clinical trial was completed in April 2006, the two companies did not release the results of the study until January 2008. During that time, Merck and Schering-Plough had aggressively advertised Vytorin as a better alternative to Zocor. Merck and Schering-Plough are currently defendants in about 50 civil suits related to Vytorin's potentially misleading marketing. Combined prescriptions of Vytorin and Zetia fell by 23 percent from January to May, but there are indications that the drop may be slowing down. US prescriptions fell by 1.1% to 2.5 month from April to May. [edit] Major Drugs and Industry TrendsSignificant research and money-making drugs are related to long-term ailments such as cardiac disease, osteoporosis, and asthma. The following are some notable trends in drug development and how Merck's most important drugs fit in. [edit] CholesterolThe public is generally aware of "good" (HDL) and "bad" (LDL) cholesterols and its consequences on long-term cardiovascular health. The development of a class of effective cholesterol lowering drugs known as "statins" is relatively recent. Statins currently on the market work to decrease LDL with similar efficacy. Merck's Zocor constitutes 20% of the market. Its main competitors are Lipitor by Pfizer and Crestor by AstraZeneca. Currently, there are no effective medications for increasing HDL cholesterol. Merck had been developing an experimental drug called Cordaptive that would increase HDL, but the FDA rejected the application on April 29. Merck is in a joint venture with Schering-Plough to market Vytorin, which combines Zocor and a new drug called Zetia. As a combination drug, Vytorin enjoys patent protection. However, the drug has faced controversy over its advertising and whether it is more effective than Zocor. See Vytorin under |Litigation. [edit] HypertensionHigh blood pressure is another predictor of cardiovascular disease. There is an enormous array of drugs that lowers blood pressure by varying means. Merck's Cozaar is a drug used primarily to treat hypertension, but is also used to treat renal disease caused by diabetes. It is usually a second-line drug, meaning doctors usually prescribe other medications before resorting to Cozaar, since lower cost alternatives exist for most patients. Cozaar belongs to a class of anti-hypertensive drugs known as angiotensin II receptor antagonists that now includes competitor Diovan by Novartis. [edit] OsteoporosisOsteoporosis, the reduction in bone density and increase in risk of fracture, affects 1 in 3 woman over the age of 50. Fosamax is currently one of the most prescribed drugs for osteoporosis. While it is a major money-maker for Merck, the US patent expired in February 2008. Generic competition cut sales by 37 percent in the first quarter of 2008, to $470 million. Although the generics have entered the US market, the EU patent office has recently reinstated the Fosamax patent through 2018. Forteo is an injected osteoporosis drug by competitor Eli Lilly. A recent research study financed by Eli Lilly indicated that after 18 months, patients taking Forteo had a 1 percent risk of developing a spine fracture, while those taking the competitor drug Fosamax had a 6 percent risk. However, the risks of other types of fractures were similar. While it is not yet clear how significant the results of this study may be, it may put Forteo in a better competitive position in the future. [edit] Asthma and AllergiesThe oral drug Singulair is Merck's most profitable product. It is used to maintain asthma symptoms and relieve seasonal allergies. It is not useful in treating acute asthma attacks, for which an inhaler is needed. After 2007, Singulair will be the last branded drug in the allergic rhinitis market. [edit] VaccinesMerck's Gardasil is a vaccine for the human papillomavirus (HPV) that causes most cervical cancers and genital warts. The target market for this vaccine is approximately 118 million girls and women in the U.S., EU, and other developed countries. Texas has mandated the vaccine beginning in 2008, with more than 20 other states considering similar legislation. Gardasil sits at the forefront of Merck's drug development pipeline, as long-term adoption is almost certain. See Legislation and Medication for more about the interaction between governments and pharmaceutical companies. However, recent sales indicate that there was no significant increase in government purchases of the vaccine, suggesting that sales are leveling off to the demand of the market. Whereas previously Gardasil use was evenly distributed from nine to twenty six-year-olds, Merck is currently pushing the vaccine to the twelve to eighteen-year-old and college age ranges. 2007 sales have totaled $1.4 billion. In the international market, the drug has been approved in 86 countries and about to launch in 72 countries. In the 2008 first quarter earnings call, the company announced forecasts of $2 billion this yea. Two other vaccines are Zostavax, for shingles, and Rotateq, for rotavirus, and have recently entered the market. A recent study has shown Rotateq to reduce hospitalization and emergency department visits by nearly 100%. Rotateq will be in direct competition with GlaxoSmithKline's Rotarix, which is also a rotavirus vaccine in late clinical trials. On April 30, the FDA sent a warning letter to Merck concerning violations at its main vaccine plant. The company has 15 days to respond to the letter, after which the FDA may suspend the plant's manufacturing license. Both the FDA and Merck have stated that the issues should not affect the safety of the company's vaccines. [edit] DiabetesThe U.S. diabetes market is estimated to be $20 billion and growing, fueled by the increase in obesity and poor lifestyle habits in the population. Januvia is a new diabetes drug developed by Merck and recently approved by the FDA. Sales totalled $667 million in 2007. The drug has received insurance reimbursement coverage in approximately 80% of its target market, which will benefit further sales. Januvia's nearest competitor, Galvus by Novartis, will not enter the market until 2008. Januvia also competes directly with Amylin's Byetta. [edit] AIDS ResearchThe company has been testing an experimental AIDS vaccine in several countries in Africa, North and South America. In September of 2007, after several international trials showed that the vaccine did not prevent HIV infection, Merck decided to stop further trials. However, the company released concerns that the vaccine may actually increase the risk of infection. As a result, all volunteers are being notified of whether they received a vaccine or placebo shot. While financial expectations were not particularly high for Merck's AIDS vaccines, it does represent a large setback for the medical community in finding a cure for one of the largest epidemics. [edit] Joint VenturesMerck is engaged in joint ventures with AstraZeneca, Merck/Schering-Plough, Merial, Sanofi Pasteur, and Johnson & Johnson. [edit] VioxxIn 1999, the United States Food and Drug Administration ("FDA") approved Vioxx (known generically as rofecoxib), a Merck product that became widely used for treating arthritis. Vioxx was stronger than existing medications, while easier on the stomach than established anti-inflammatory drugs such as naproxen. Vioxx became one of the most prescribed drugs in history. Thereafter, studies by Merck and by others found an increased risk of heart attack associated with Vioxx use when compared with naproxen. There was no indication of this risk in the original placebo-controlled safety trials, and it was possible that the effect was more related to naproxen decreasing the risk of heart attacks than one of Vioxx increasing the risk. Nonetheless, in 2002 Merck adjusted the labeling of Vioxx to reflect possible cardiovascular risks. On September 23, 2004, Merck received information about results from a clinical trial it was conducting that included findings of increased risk of heart attacks among Vioxx users who had been using the medication for over eighteen months.[5] On September 28, 2004, Merck notified the FDA that it was voluntarily withdrawing Vioxx from the market, and it publicly announced the withdrawal on September 30. The FDA has since recommended that Vioxx be put back on the market, but with a more prominent warning regarding cardiovascular risks on its label. On November 5, 2004 the medical journal The Lancet published the results of its analysis of the available studies. It concluded that "the unacceptable cardiovascular risks of Vioxx (rofecoxib) were evident as early as 2000..." [6] The journal's editors criticized Merck for having kept the drug on the market as long as it did before withdrawing it, and also criticized the FDA for its failure of regulatory oversight. About 50,000 people have sued Merck claiming that they or their family members have suffered medical problems such as heart attacks or strokes after taking Vioxx.[7] In 2005, Merck was found liable in the first case that went to trial and the plaintiff was awarded $253.4 million in damages; however, the judgement was subsequently reduced to $20 million and then, upon appeal, the verdict was reversed in 2008.[7] In November 2007, Merck proposed to pay $4.85 billion to settle most of the pending Vioxx lawsuits.[8] The settlement will require that claimants provide medical proof of having suffered a heart attack or a stroke and show they received at least 30 Vioxx pills. This proposed settlement is generally viewed by industry analysts and investors as a victory for Merck, considering that original estimates of Merck's liability reached as high as $50 billion.[9] As of mid-2008, plaintiffs have prevailed in only three of the twenty cases that have reached juries, all with relatively small awards.[7] On May 20, 2008, Merck was found liable for using deceptive marketing tactics to promote Vioxx and 30 states will split the $58 million settlement. The amount is the largest multi-state settlement against a pharmaceutical company.[10] All its new television pain-killer advertisements must be vetted by the Food and Drug Adminstration and changed or delayed upon request until 2018.[11] [edit] Comparison to CompetitorsCompetition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Merck’s competitors by each drug market. Major competitors to Merck include Novartis, Pfizer, and Bristol-Myers Squibb. All three are pharmaceutical powerhouses, some with compatible drugs. For example, Pfizer produces Lipitor, which is in direct competition with Zocor, and Novartis produces Diovan, which is in direct competition with Cozaar.
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