Merck's COVID-19 Drug Posts Poor Data; No Change to FVE

Merck’s (MRK) updated analysis showing less efficacy with coronavirus treatment molnupiravir doesn’t impact our fair value estimate. The reduced efficacy on preventing death or hospitalization of 30% (down from 48% on the interim analysis) will likely reduce the sales potential of the drug, especially with Pfizer’s (PFE) COVID-19 treatment Paxlovid showing almost 90% efficacy. However, we didn’t change our fair value estimate when we added molnupiravir sales to the Merck discounted cash flow model because the sales are split with partner Ridgeback, and because we expect sales to fall off quickly regardless of efficacy as the pandemic recedes with increased vaccine utilization. Despite the limited impact on Merck’s fair value estimate, the quick speed to market of molnupiravir reinforces the strong innovation power at Merck, which is a core element in the firm’s wide moat.

From a competitive perspective, the falling efficacy of molnupiravir is an additional positive for Pfizer’s Paxlovid. We think it is unlikely Pfizer’s final data from its Paxlovid study will follow a similar pattern of reduced efficacy in the final readout, and the lower efficacy from molnupiravir gives Paxlovid increased likelihood of market leadership. Further, if the new omicron COVID-19 variant is elusive to current vaccines, we would likely increase our sales projections for molnupiravir and Paxlovid, but the impact would likely be more meaningful for Pfizer, which doesn’t split the economics with a partner and would likely gain most of the upside.