What To Expect From Merck's Q1 Earnings

Merck ( MRK ) will report its Q1 2017 earnings on May 2. The primary growth driver is likely to be cancer drug Keytruda, along with Hepatitis C drug Zepatier. The combined sales of these 2 drugs stood at nearly $1.96 billion in 2016. This year, we expect at least 50% growth in their revenue and believe that the first quarter is likely to reflect this continued ramp up of sales. However, there are a number of legacy drugs which are facing sales pressure due to generic and branded competition. The offsetting effect is likely to be significant and keep the overall growth in check.

Our price estimate of $67 for Merck is nearly 15% above the market.

Keytruda Has Been Expanding Its Usage

Keytruda, which was initially approved for advanced Melanoma, has seen its usage expand to metastatic or recurrent head and neck squamous cell carcinoma, and metastatic non-small cell lung cancer (NSCLC). In Q4 2016, Keytruda received first-line treatment approval in the U.S., EU and Japan for patients suffering from non-small cell lung cancer and exhibiting high levels of PD-L1. We expect these approvals to accelerate the drug's growth this year.

The approval for treatment of first line NSCLC with PD-L1 > 50% gives Keytruda access to a large patient pool and first mover advantage. While Roche's Tecentriq has received FDA approval for treatment of lung cancer patients who have failed to respond to previous therapy, the drug doesn't really address first line treatment which is where Keytruda is expanding.

Competition Will Continue To Keep Growth In Check

Cubicin, an antibiotic, has lost its patent protection and is likely to lose market share to generics. Additionally, we expect Zetia and Vytorin to start facing generic competition this year. Moreover, diabetes 2 drug Januvia has been critical to Merck's business, with nearly $4 billion in annual revenue. While the drug is still patent protected, it is facing pricing pressure due to competition from other branded drugs. Isentress, an anti-infective drug, is likely to see sales pressure due to slow growth of integrase class and strong competition.

Gardasil has continued on an upward track and has helped keep the huge anti-infective drug and vaccine franchise resilient. While the vaccine has benefited from public sector purchases, it now faces a challenge as practitioners move from three doses to two doses. Merck is attempting to address the expected decline in volume by raising prices, but it may not be enough. We also expect Remicade and Singulair to show declines.

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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.

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