US drugmaker Merck reported a weak first quarter earlier this week,leading to share price declines in the pharmaceuticals sector on both sides of the Atlantic. Here, Morningstar.com analyst Damien Conover takes a look at the figures and assesses the impact that Merck's international peers, such as UK pharmaceuticals firms AstraZeneca and GlaxoSmithKline, might have on the American company's pipeline.
Merck reported first-quarter results that fell a bit short of our expectations, but we don't expect any major changes to our fair value estimate. Excluding the 300-basis-point reduction due to unfavourable foreign exchange rates, Merck's total sales declined 5% largely due to the patent loss on osteoporosis drug Fosamax. We expect Merck's growth will improve over the rest of the year, as the company has now annualized the initial generic launch on Fosamax. Also, we expect further improvements in the company's operating margins, as the company continues to implement a cost-saving restructuring programme.
Many of Merck's products posted poor growth rates in the quarter. The company's top-selling drug Singulair for respiratory disease declined 4% year over year. We believe the suicide side effect associated with the drug is slowing the drug's use in the allergy setting. We expect these concerns to subside and the drug should return to positive growth by the end of the year. Also, the company's human papillomavirus vaccine Gardasil continues to struggle in expanding its targeted patient group, falling 33% versus the prior-year period. The magnitude of the decline surprises us. We anticipated the successful launch of Gardasil last year (and the one-time nature of the vaccine) would lead to a drop-off in 2009 (our forecast calls for low double-digit decline), but our expectations for the vaccine's penetration have not been met so far. Gardasil is not gaining traction in older patient groups, and we don't expect this situation to improve quickly. Further, in 2010 we expect GlaxoSmithKline to launch a competing vaccine, which will likely create additional challenges for Gardasil.
While many of Merck's drugs suffered in the quarter, a few key drugs posted strong growth. Diabetes drug Januvia grew an impressive 51% year-over-year to more than $500 million. The drug's growth continues to exceed our expectations, and we anticipate robust growth for Januvia over for the remainder of the year. However, Bristol-Myers and AstraZeneca will likely launch competing drug saxagliptin later in 2009 in the United States--following a strong FDA advisory committee meeting in April, we believe saxagliptin will become a tough competitor to Januvia. Merck's HIV drug, Isentress, also generated $150 million in the quarter, beating our expectations; the growth is impressive given the drug's recent approval.
On the pipeline front, Merck disappointed us with the delay of filing migraine drug telcagepant, which we had expected to occur later in 2009. Based on newly discovered liver problems associated with the drug, Merck announced a delay to the filing. Given the very risk-sensitive FDA, we don't expect telcagepant will reach the market for several years. However, given the strong pipeline that Merck is gaining through the Schering-Plough acquisition, we believe the delay of telcagepant will not weigh heavily on Merck's future growth prospects.
Damien Conover, CFA is a senior stock analyst for Morningstar.com.
