Market Undervalues Merck’s Pipeline

In tandem with the earnings release, Merck reported positive safety data from Januvia study TECOS. While we had anticipated favorable data for Januvia (14% of 2014 sales), the concerns surrounding cardiovascular risks were elevated, as a similar drug (Onglyza from AstraZeneca) showed signs of increased heart failure risks. We don't expect to increase our projections for Januvia, but the study removes a key risk for the company.

In the quarter, total sales increased 4% year over year (excluding changes in currency and normalized for divestitures and acquisitions) as new products offset slowing mature drug sales. In particular, immunology drug Remicade is holding up well (down only 3%) despite biosimilar competition in Europe, but we expect sales declines will eventually accelerate. Strong Januvia and Janumet sales (up 10%) helped buoy Merck's results, and together with strong U.S. sales overall, this led to outsize margin expansion. Given the strong relative pricing in the United States, we expect this trend to continue through the year.

On the pipeline front, Merck is making solid strides, led by its immuno-oncology platform. Keytruda sales were $83 million in the quarter, but we believe this is just the tip of the iceberg as the drug expands into new indications. We expect the addition of the lung cancer indication later in 2015 to bring an additional $5 billion in Keytruda sales at peak.

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