Merck Could Have a Home Run in Sight

For long-term fans and shareholders of Merck & Co. (NYSE:MRK), the last 10 years haven’t been easy ones. Profits have been stagnant, the stock is down for the period and its best selling drug Singulair (for asthma) is going to lose patent protection in August of this year. Considering Singulair contributed $5.5 billion worth of Merck’s total 2011 revenue of $48 billion, and knowing that patent expirations can absolutely devastate a drug’s sales, the stock’s struggle isn’t surprising in the least.

Still, there’s no denying that MRK has been on a roll for a little more than a month, rallying from $37 in early June to Friday’s closing level of around $43. The 16% advance also carried the stock into new 52-week high territory.

The bearish scenario and the bullish move certainly seem at odds, prodding two simple questions:


Not that it’s a good reason, but the bulk of the recent rally is being powered by good news on the research and development front. Merck’s drug odanacatib — which prevents fractures in brittle bones — was in Phase 3 trials as treatment for post-menopausal women with osteoporosis. And, it works.

In fact, it works so well that the company’s advisory panel recommended Merck go ahead and end the trial now and submit a new drug application, even though the last stage of the trial had not yet reached its original planned end date. Merck agreed, announcing the good news a couple of days ago (though the news was suspected a month ago) and the stock made another big jump.

That may not necessarily be “news” to investors at this point, however. What investors want to know now is what kind of revenue odanacatib could generate if and when it is given the green light from the FDA.

The bad news first … the revenue the osteoporosis drug could create won’t offset the revenue Merck is about to lose once Singulair’s patent expires next month.

The good news, though, is that odanacatib isn’t anything to dismiss as meaningless.

The sales outlooks vary widely, but all of them are big. Deutche Bank opines the drug could see sales of $800 million by 2016. Credit Suisse estimates the drug’s potential could be $1 billion or more. Citi said the drug’s sales could hit $2 billion by 2020.

Those aren’t just random guesses either. They’re based on existing and former — though also inferior — competition in the osteoporosis drug space.

Amgen’s (NASDAQ:AMGN) Prolia, which is designed to improve bone strength, drove a little more than $200 million in sales last year. Eli Lilly & Co. (NYSE:LLY) generated more than $2 billion worth of revenue between its two bone-strength drugs, Evista and Forteo, last year. GlaxoSmithKline (NYSE:GSK) and Roche (PINK:RHHBY) saw its bone drug Boniva drive $517 million in sales in 2011. And, Merck’s Fosomax managed to generate $3 billion in sales in its last patent-protected year, which was 2007.

Will the Rally Continue?

That’s the million dollar question, isn’t it? As is so often the case, whether or not a rally is “continuing” is a matter of timeframes.

In the short run, MRK is overbought and even inviting a pullback thanks to the bullish gap the stock left behind on Thursday morning. From that perspective there’s no particular need to pile on shares now, if you’re looking for a quick buck.

For those who are thinking longer-term, however, the advent of a new — and meaningful — drug could be the long-awaited catalyst the stock needs.

Veteran pharma traders know that pharmaceutical stocks can trade anywhere from six months to six years into the future, depending on the strength of the development pipeline and the potential of those drugs. Merck is reported to be planning the NDA submission sometime in the first half of 2013, meaning if odanacatib is the real deal, then the stock may already be reflecting its success.

As for what the drug could realistically mean in terms of a fiscal impact for Merck, when talking about sales forecasts, the truth is usually somewhere in the middle. Most of the low-end sales forecasts put odanacatib’s potential at around $500 million annually. The high-end outlook is $2 billion per year.

The middle ground and realistic projection, therefore, is around $1 billion …  in line with what other therapies in the same space are doing. The number could inflate considerably as odanacatib’s usage expands to other ailments and the average age of the population increases.

And speaking broadly, compared to the others in the bone-strength arena, Merck’s drug looks strong enough to make capturing market share a reasonable hurdle.

Bottom Line

Owning a major pharmaceutical company based on one drug alone isn’t wise, and odanacatib isn’t likely to become a true ‘blockbuster’ for Merck. It’s still going to be quite an asset though, and certainly bolsters the bullish case for the stock here. Just be picky about any long-term entry level.

As of this writing, James Brumley did not own any of the aforementioned securities.

Article printed from InvestorPlace Media,

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