Merck 4Q16 – Januvia revenue grows 2% YOY to all-time high of $6.1B for 2016; Franchise sales up 4% YOY to $1.5B in 4Q16; No mention of diabetes pipeline – February 2, 2017

Merck provided its 4Q16 and full year 2016 financial update in a recent conference call led by CEO Mr. Ken Frazier. See below for our top five highlights on Merck’s diabetes business (though we wish we heard more from management about the diabetes pipeline products!) followed by relevant Q&A. This report also contains a pooled analysis of the DPP-4 inhibitor class, where Merck’s Januvia (sitagliptin) franchise continues to dominate.

Financial Highlights

1. The DPP-4 inhibitor Januvia (sitagliptin) franchise grew 4% year-over-year (YOY) in 4Q16, with sales of $1.5 billion. US sales rose 12% YOY to $797 million, offsetting a 3% YOY decline in ex-US sales to $712 million. Management reported 3% growth in Januvia’s share of total DPP-4 inhibitor prescriptions (TRx) in the US, and announced that the product has now seen >10 consecutive quarters of US volume growth. Looking at full year revenue, Januvia and Janumet (sitagliptin/metformin) together posted an all-time high of $6.1 billion, up 2% YOY from 2015.

2. Januvia captured 64% of pooled revenue from all major DPP-4 inhibitors in 4Q16, when the class as a whole grew 2% YOY to $2.4 billion. Full year sales for the class grew 4% YOY to $9.7 billion in 2016.

3. Global sales of standalone Januvia totaled $932 million in 4Q16 and $3.9 billion in 2016, both marking 1% YOY growth.

4. Janumet (sitagliptin/metformin) posted $577 million in sales in 4Q16, which represents 10% YOY growth. As we’ve noticed for other DPP-4 inhibitor franchises as well, it seems that the combination product is driving growth – Janumet was responsible for 82% of franchise growth in 4Q16. Janumet sales for the full year 2016 totaled $2.2 billion, which represents 2% YOY growth.

Pipeline Highlights

5. There was no mention of SGLT-2 inhibitor candidate ertugliflozin (filed with the FDA in 4Q16), biosimilar insulin glargine candidate MK-1293 (filed with the FDA in 3Q16 and currently facing a patent infringement lawsuit from Sanofi), or glucose-responsive insulin candidate MK-2640 (phase 1 trial completed in August 2016 according to ClinicalTrials.gov). Still, we’re very happy that Merck is expanding its involvement in diabetes – the company’s experience with Januvia could lead to new successes in SGLT-2 inhibitor and insulin therapy.

Big Picture Highlights

6. Mr. Frazier shared insights from his recent meeting with President Trump: The administration is focused on repealing and replacing the Affordable Care Act (ACA), but is still “early in that thought process,” and wants to schedule regular check-ins with representatives of the pharmaceutical industry to ensure that incentives for innovation are balanced with patient need for affordable healthcare, especially reduced out of pocket costs. The direction of the Trump administration on healthcare has been a significant talking point on many pharma earnings calls this season, including J&J and Lilly.

Financial Highlights

1. Januvia Franchise up 4% YOY in 4Q16 to $1.5 Billion, Driven by YOY Growth in US Sales; Holds 64% of DPP-4 Inhibitor Market by Value

The DPP-4 inhibitor Januvia (sitagliptin) franchise grew 4% year-over-year (YOY) and fell 3% sequentially in 4Q16, with sales of $1.5 billion. Looking at full year revenue, Januvia and Janumet (sitagliptin/metformin) together posted an all-time high of $6.1 billion in sales, up 2% YOY from 2015. These numbers demonstrate a strong performance to close out the year, but, notably, these are relatively easy YOY comparisons, as Januvia/Janumet revenue declined 12% YOY in 4Q15 and was flat YOY between 2014 and 2015. By geography, US sales rose 12% YOY to $797 million in 4Q16, offsetting a 3% YOY decline in ex-US sales to $712 million. It’s great to see the DPP-4 inhibitor do well in the US despite the tough pricing environment surrounding diabetes drugs (for brief context: US sales of AZ’s DPP-4 inhibitor Onglyza declined 27% YOY in 4Q16, US Januvia revenue fell 10% YOY in 3Q16, and the public and political frustration with soaring insulin costs has reached a boiling point in the US). Management reported 3% growth in Januvia’s share of total DPP-4 inhibitor prescriptions (TRx) in the US as well, and announced that the product has now seen >10 consecutive quarters of US volume growth.

Figure 1: Total Januvia Franchise Sales (1Q07-4Q16)

2. Januvia Led Pooled $2.4 Billion DPP-4 Inhibitor Market in 4Q16

Januvia captured 64% of pooled revenue from all major DPP-4 inhibitors in 4Q16, when the class as a whole grew 2% YOY to $2.4 billion. Pooled sales were down 4% sequentially from $2.5 billion in 3Q16.  Januvia/Janumet continue to comfortably lead the DPP-4 inhibitor class. By value, Novartis’ Galvus (vildagliptin) came in second with 13% market share, followed by Lilly/BI’s Tradjenta (linagliptin) with 12%, AZ’s Onglyza (saxagliptin) with 6%, and finally Takeda’s Nesina (alogliptin) with 5%. Note that these value share estimates are based on our calculations for total Tradjenta revenue, since only Lilly’s share (and not BI’s) is reported publically. On the whole, DPP-4 inhibitors have experienced fluctuating sales in the past couple years under competition from other non-insulin diabetes agents with greater efficacy or additional benefits beyond glucose-lowering – GLP-1 agonists and SGLT-2 inhibitors in particular – as well as US pricing pressures affecting diabetes. Our pooled analyses from 1Q16, 2Q16, and 3Q16 showed similar, single-digit YOY growth for the class.

• For the full year 2016, DPP-4 inhibitor sales totaled $9.7 billion vs. $9.3 billion for 2015. This represents a modest YOY increase of 4%.

Figure 2: Pooled DPP-4 Inhibitor Sales (1Q07-4Q16)

3. Standalone Januvia Essentially Flat YOY at $932 Million in 4Q16, $3.9 Billion in 2016

Global sales of standalone Januvia totaled $932 million in 4Q16 and $3.9 billion in 2016, both marking 1% YOY growth. Quarterly revenue fell 7% sequentially from $1 billion in 3Q16, and 4Q16 marked a second consecutive quarter of sequential decline for standalone Januvia (sales dipped 6% sequentially in 3Q16 as well). US revenue increased 10% YOY and dropped 5% sequentially to $538 million, while ex-US revenue decreased 9% YOY and 10% sequentially to $394 million – this geographical trend parallels that of the franchise as a whole in 4Q16, with US performance canceling out underwhelming international sales.

Figure 3: Standalone Januvia Sales (1Q07-4Q16)

4. Janumet Drives Franchise Growth with 10% YOY Sales Spike

Janumet (sitagliptin/metformin) posted $577 million in sales in 4Q16, which represents 10% YOY and 5% sequential growth. As we’ve noticed for other DPP-4 inhibitor franchises as well, it seems that the combination product is responsible for driving the lion’s share of growth – Janumet was responsible for 82% of franchise growth in 4Q16. For comparison, Januvia was responsible for only 18% of franchise growth for the quarter. Janumet sales for the full year 2016 totaled $2.2 billion, which represents 2% YOY growth. The fixed-dose combination produced YOY growth across all regions for both 4Q16 and 2016, although once again (as was true for standalone Januvia and for the whole franchise), the US business was slightly stronger in 4Q16: Sales in the US rose 14% YOY vs. a 6% YOY rise in ex-US sales.

Figure 4: Janumet Sales (2Q07-4Q16)

Pipeline Highlights

5. No Discussion of Diabetes Pipeline

There was no mention of diabetes-related products in development at Merck, which was disappointing given the several exciting pipeline projects that we’re eager for updates on. These include Pfizer-partnered SGLT-2 inhibitor candidate ertugliflozin (filed with the FDA in 4Q16 as monotherapy, in combination with metformin, and in combination with sitagliptin), biosimilar insulin glargine candidate MK-1293 (filed with the FDA in 3Q16 and currently facing a patent infringement lawsuit from Sanofi), and glucose-responsive insulin candidate MK-2640 (phase 1 trial completed in August 2016 according to ClinicalTrials.gov). Overall, we’re very happy that Merck is expanding its involvement in diabetes – the company’s experience with Januvia could lead to new successes in SGLT-2 inhibitor and insulin therapy. See below for a complete picture of Merck’s current diabetes pipeline.

• We’re extremely excited for Merck to expand its diabetes portfolio by entering the insulin commercial landscape. Lilly/BI have launched their biosimilar insulin glargine Basaglar in the US to tremendous early success, and we imagine MK-1293 could do just as well while expanding patient choice and offering another lower-cost insulin option – we expect Merck’s strong familiarity among primary care prescribers (among the most prolific prescribers of Januvia) will serve the company well as it seeks to establish its biosimilar insulin. That said, MK-1293 did not seek an interchangeable designation and, as a company that has not been historically insulin-focused, Merck may encounter concerns from some regarding the safety and quality assurance of its biosimilar, given the enormous complexity inherent in insulin manufacture. Additionally, it remains to be seen how additional biosimilar insulin glargine options may impact formulary negotiations with PBMs (CVS Health and UnitedHealthcare both excluded originator Lantus in favor of Basaglar; with multiple biosimilar insulin glargines on the market, would each formulary favor a single biosimilar or include multiple biosimilars?) Overall, we assume that pricing and competitive pressures in the insulin field are unlikely to abate in the near-term (especially given the growing popularity of non-insulin agents such as GLP-1 agonists and SGLT-2 inhibitors) and we’ll be watching closely to see how Merck addresses these challenges. MK-1293 seems to be closest-to-market product within Merck’s diabetes pipeline, although the lawsuit from Sanofi could postpone FDA approval and commercial launch as a similar lawsuit did for Basaglar.
• Pfizer-partnered ertugliflozin was submitted to the FDA in late 2016 and a regulatory decision is expected by end of 2017. If approved, it would join SGLT-2 inhibitors Invokana (canagliflozin, from J&J), Farxiga (dapagliflozin, from AZ), and Jardiance (empagliflozin, from Lilly/BI) – once again, we’re excited by the prospect of expanding patient choice. The VERTIS CV cardiovascular outcomes trial (CVOT) for ertugliflozin is ongoing, with an expected completion date of October 2019. We’re disappointed by the lack of mention of this product from both Merck and Pfizer in their 4Q16 updates – we’re especially eager to learn more about the companies’ marketing and promotion strategy of the ertugliflozin franchise. As we understand it, it appears that the ertugliflozin/sitagliptin combination will be a particular focus for the franchise – we’re eager to see a company invest substantial resources in establishing an SGLT-2 inhibitor/DPP-4 inhibitor fixed-dose combination (following the largely quiet news flow for this class since the launch of Lilly/BI’s Glyxambi [empagliflozin/linagliptin]). Given that fixed-dose combinations are already currently driving the majority of growth of Merck’s Januvia franchise, we expect that the ertugliflozin/sitagliptin combination could do very well given smart positioning and promotion.
• We were delighted to see that Merck’s phase 1 study of smart insulin MK-2640 concluded in August 2016 after several delays (reflecting the challenges to glucose-responsive insulin), and we’re now on the edge of our seats for the data. Unfortunately, the company has been completely silent on this front. We heard at the recent JDRF Mission Summit that Merck does indeed have data from its phase 1 trial, which – regardless of the findings, whether positive, negative, or neutral – will be valuable to researchers working on various approaches to smart insulin therapy. So, while the company is not obligated to share the results, we certainly hope that Merck comes forward soon with something concrete from its MK-2640 program.

Merck Diabetes Pipeline Summary

Big Picture Highlights

6. Management Addresses Concerns about the Healthcare Landscape under President Trump

Mr. Frazier shared insights from his recent meeting with President Trump: The administration is focused on repealing and replacing the Affordable Care Act (ACA), but is still “early in that thought process,” and wants to schedule regular check-ins with representatives of the pharmaceutical industry to ensure that incentives for innovation are balanced with patient need for affordable healthcare, especially reduced out of pocket costs. The tone during Q&A was one of mitigating concern – Mr. Frazier reflected on his meeting as a generally positive conversation. He suggested that the Trump administration understands industry challenges as well as the need to lower co-pays and particularly burdensome costs for patients. While uncertainty lingers, total repeal of the ACA seems like a very real possibility at this point, a move that is extremely worrisome from the patient perspective. We recognize that the ACA during the Obama administration was in need of further work, but we also underscore that few policies are perfect in their first iteration. President Trump’s administration has the opportunity to improve the nation’s health insurance landscape rather than completely dismantling it. Notably, the direction of the Trump administration on healthcare has been a significant talking point on many pharma earnings calls this season, including J&J and Lilly.

Questions and Answers

Q: Can you talk about how the meeting with President Trump concluded, and any next steps that you foresee from the administration?

A: The president was clear that his ultimate goal is to create US jobs and ease the cost burden on patients. But he recognizes the importance of this industry and doesn’t want to interfere with incentives for innovation. We also talked about reforming taxes, easing regulation, ensuring the right kinds of negotiations around value-based healthcare. We don’t have a second meeting established on his calendar, but he expressed interest in regular check-ins and we will definitely pursue these future meetings. Obviously, the administration is focused on repealing and replacing the Affordable Care Act (ACA), but is very early in that thought process. We will continue, along with our colleagues in pharma, to reach out to both the administration and Congress to ensure that our interests and represented and that patients continue to have access to high-quality and affordable healthcare.

Q: Is there a false sense of security building after the meeting with President Trump? I just want to make sure that there’s not a proposal in the works to create some sort of bidding or direct negotiation process?

A: We can’t say what people in the administration are thinking, beyond what we heard in that one meeting. What we heard gives us confidence that the Trump administration understands the challenges associated with research-based pharmaceutical industry growth. Mr. Trump was concerned less about the cost of drugs in aggregate and more concerned about how patients need to be able to afford co-pays and things of that nature. The discussion went in the direction of how we can harness the private markets to help patients afford their medicines. Our conversation does not lead me to believe that the administration thinks the solution is secretarial negotiations.

-- by Payal Marathe, Helen Gao, and Kelly Close