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Attention Merck Investors: It's Time to Start Worrying

Doctor Writing Prescription Getty

Doctor Writing Prescription Getty

Merck (NYSE: MRK) , like many of its Big Pharma brethren, is angling to find ways to grow following an extended period of patent expirations sapping its ability to expand its top-line. Merck has done a good job by bringing cancer immunotherapy Keytruda to market -- it'll likely surpass $1 billion in annual sales in 2016 -- and acquiring businesses that complement its core therapeutic focuses. The addition of Cubist Pharmaceuticals, for example, provides an immediate boost to Merck's acute hospital care business, and more importantly adds to its bottom-line.

But Merck remains perilously tied to the success of lead drug Januvia, a DPP-4 inhibitor that's among the most popular type 2 diabetes treatments. Overall, Januvia (which is also known as Janumet in overseas markets) brought in $1.41 billion in sales in the first quarter, putting it once again on track to generate roughly $6 billion in annual sales. Januvia regularly comprises about $1 of every $6 Merck generates from pharmaceutical product sales, and is, needless to say, critical to Merck's success.

New competition arises

Yet Januvia has faced challenges recently in the form of next-generation competition: SGLT-2 inhibitors. Instead of using DPP-4 inhibitors to increase incretin levels in the pancreas and inhibit the release of glucagon in the liver, SGLT-2 inhibitors work in the kidneys by blocking glucose absorption. Excess glucose is then excreted by the patients through their urine, thus maintaining glycemic balance.

Biotech Research And Development Lab Getty

However, it does inject a major dose of reality into the veins of Merck's shareholders. Januvia is now a mature therapy, and in spite of its dominant market share among DPP-4s and its strong pricing power as a result of its market share, a superior treatment option may exist. The only thing potentially holding SGLT-2s back from taking charge is 1) the confirmation from J&J's Invokana that SGLT-2s have a positive cardiovascular effect, and 2) that SGLT-2 inhibitors pose no long-term health threats. If you recall, a few rare cases of ketoacidosis have been reported with SGLT-2 use that the FDA is looking into. However, those cases don't appear threatening to the possible future dominance of this drug class.

Though Januvia's $6 billion in annual sales would not be expected to disappear overnight, a slow and steady retracement in sales seems quite possible -- and that's a scary scenario for Merck, which has only recently managed to reignite its organic growth. Investors who've considered buying into Merck, or who currently own shares of the U.S. drug giant, need to be aware that its largest product portfolio contributor may be running out of time, and they'll want to adjust their investment expectations accordingly.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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