Big Pharma is back, with shares of giant drug manufacturers doubling the returns of the broad market over the past six months. Yet Merck has been conspicuously left behind.
Since last fall — shortly after the patent on top seller Singulair expired, exposing the asthma drug to cheap competition — Merck shares have sunk 3%. Adding to the Street’s fears: the company’s difficulties in developing next-generation blockbusters. What investors don’t realize, though, is that Merck’s patent and pipeline problems aren’t as dire as they seem.
Loss of Singulair patent
For nearly a decade, drug manufacturers have been plagued by patent expirations, which have allowed makers of cheaper generic drugs to swoop in and take revenues.
“The large pharmaceutical companies have all been going through this,” says Erich Patten of the Cutler Equity Fund, which owns Merck shares. Pfizer experienced it in 2006 with the antidepressant drug Zoloft and in 2011 with its cholesterol fighter Lipitor. “It’s just been Merck’s turn recently,” Patten says.
After Singulair went off patent, quarterly sales of the respiratory medication plunged from $1.5 billion in the fourth quarter of 2011 to $480 million late last year. Investors are now waiting to see if Merck can recover the way that Pfizer did.
A healthy pipeline
The loss of Singulair is a big blow, but, going forward, patent expirations threaten less than 3% of Merck’s sales — far less than the industry average.
Merck also “has one of the healthiest base business of its U.S. major-pharma peers, putting less pressure on the company’s pipeline to generate growth,” noted J.P. Morgan analyst Chris Schott in a recent report.
The diabetes drug Januvia, for instance, is becoming as big as Singulair was and is expected to add $750 million to sales growth each year from now through 2020.
As for new blockbusters, clinical trials of treatments for osteoporosis, cholesterol, and heart disease have been disappointing. To turn things around, though, Merck has hired the former chief of R&D at Amgen.
A generic price
Even with the Singulair loss, Merck’s overall revenue is expected to grow 2% annually for the rest of the decade. Though modest, that’s in line with the industry average and slightly ahead of sales growth at its chief rivals. As for Merck’s earnings, they’re expected to climb at a healthier 8% annual clip.
Despite these facts, investors continue to fixate on Singulair. Merck shares are trading at cheap levels relative to the industry average and pay a generous 4.0% yield. That payout is driven in part by Merck’s industry-leading cash cushion of more than $13 billion, a stash that has also helped the drug giant spend more on R&D last year than rivals Eli Lilly, Pfizer, and Bristol-Myers Squibb .