Merck 2Q18 – Diabetes +3% YOY to $1.6B; Januvia franchise +1% YOY to $1.5B with 14% YOY growth OUS; SGLT-2 Steglatro franchise posts ~$37M, bringing class to >$1B with 21% YOY growth – July 27, 2018

Merck reported 2Q18 financial results today in a call led by CEO Mr. Ken Frazier. Listen to the webcast, read the transcript, and check out the news release, financial highlights, and pipeline slides. There was a near dearth of commentary on Merck’s diabetes portfolio during prepared remarks and Q&A, but we picked out five financial and pipeline highlights, alongside our pooled analysis of the SGLT-2 inhibitor market for 2Q18, below. Largely on the strength of Steglatro’s first full quarter on the market, Merck Diabetes grew 3% YOY and 10% sequentially to $1.6 billion, from $1.5 billion in 2Q17 and $1.4 billion in 1Q18.

Overall, we gathered that Merck is very optimistic about the strength of its business and long-term outlook. This is certainly being driven by its cancer pipeline and we hope and expect to see it drive greater investment in diabetes and other global health problems disproportionately affecting the poorest in the world. Faster expansion of access to diabetes therapy is needed across the industry and the world; Merck is at the top of the list in patient access programs in the US, per diaTribe – we hope other manufacturers begin to approach patient access in many of the ways that Merck does and that more collaborative work on this front can be done. 

Pooled Market Highlights

1. SGLT-2 Inhibitors Class Climbs 21% YOY to >$1 Billion, +3% Sequentially; Jardiance Claims 43% Total Revenue, Farxiga 41% of Global Volume; Invokana Decline Continues

The SGLT-2 inhibitor market climbed 21% YOY and 3% sequentially to a little over $1 billion in 2Q18, up from $857 million in 2Q17 and +$26 million over 1Q18. The SGLT-2 class continues to grow on a yearly basis; YOY growth of 21% is certainly quite strong, building on a more sizable 41% YOY jump in 1Q18 and 24% overall growth in 2017. That said, underlying class growth seems to have slowed in recent quarters: In 1Q18, the class fell 2% sequentially before rebounding 3% in 2Q18. Indeed, slowed underlying class growth was widely referenced across the calls of SGLT-2 manufacturers; from this base, a variety of factors are affecting individual product performances. For example, J&J cited increased discounts, higher rebates, and share loss in Invokana’s US-driven 27% YOY decline, while AZ pointed to contract gains in the US (perhaps at Invokana’s expense?) and volume growth OUS; on the other hand, Lilly attributed Jardiance’s “flat-ish” quarter to changes in rebate estimates and discount normalization. Of note, this pooled analysis is based on our estimate for total Jardiance revenue, between Lilly and BI, of $445 million.

• By value, Lilly/BI's Jardiance leads with ~43% of sales, followed by AZ's Farxiga at ~33%, J&J’s Invokana at ~21%, and Merck/Pfizer’s Steglatro at ~4%. This represents a pretty striking shift from 2Q17, when Jardiance held 36%, Farxiga 29%, and Invokana 34%. Because this is occurring on a background of (albeit lower) class growth, it certainly seems that Jardiance and Farxiga are benefitting from Invokana’s continued decline. With these results, Jardiance maintains its place as the class leader by value, rising 43% YOY but slowing down from its >100% YOY growth for 2017 overall. Again, Lilly management attributed this rather “flat-ish” quarter (-3% sequentially) to the “double whammy” of changes in rebate estimates and discount normalization over 1Q18 and 2Q18. These factors hampered Jardiance’s growth in the US, where revenue experienced a 10% sequential drop (+28% YOY); in contrast, OUS performance remained strong (+70% YOY and +10% sequentially).

• In some ways, Farxiga fared the best in 2Q18 and posted all-time high revenue of $340 million, up 36% YOY and 14% sequentially (though the latter was against an easy comparison). AZ cited volume-driven growth OUS and contract-driven growth in the US, and the product remains the international volume leader at 41%; unfortunately, it also seems that Farxiga’s gain in revenue came at the expense of lower participation in affordability and discount programs vs. 1H17, and we’re disappointed that AZ has apparently had to compromise on this front to achieve growth. The company continues to heavily invest in expanded indications, including in CKD, heart failure, and type 1 diabetes; the last has been submitted in both Japan and Europe.

• Regarding J&J’s Invokana (21% of total class revenue), worldwide sales dropped 27% YOY to post the lowest revenue for the franchise since 2014. Management attributed this drop to increasing discounts, higher rebates, and share loss ­– though we’re curious about the relative contributions of each, and we can’t help but wonder how amputation concerns are impacting this. The FDA also recently delayed its decision on a CV indication for Invokana. In brighter news, the early termination of CREDENCE due to renal protective efficacy stands as a major source of hope for Invokana and potentially the entire SGLT-2 class as a whole. This is the first renal outcomes study to complete for an SGLT-2, and it could represent a major tailwind and head start for Invokana over the rest of the class. However, interestingly, this major news was not at all mentioned on J&J’s earnings call, and we hope that this does not signal a waning commitment to advancement of the product from J&J.

• In our view, the diabetes care paradigm is very much shifting away from a singularly glucose-centric approach and toward more outcomes-based medicine, and the SGLT-2 inhibitor class is perfectly poised to succeed in such an environment. Invokana’s CREDENCE renal outcomes trial was just stopped ~one year ahead of schedule for meeting its primary endpoint, and we very much think this demonstrated renal-protective effect represents the next page in the SGLT-2 story. As an SGLT-2 class effect for cardioprotection becomes more and more accepted and with more outcomes trials in CKD (Dapa-CKD, EMPA-KIDNEY) and heart failure (Dapa-HF, EMPEROR) on the horizon, we strongly expect that the SGLT class will have new life breathed into it. As we noted in our 1Q18 roundup for the class, expanded indications would represent an enormous victory for patients, in light of the current unmet need in both CKD and HF (particularly HF with preserved ejection fraction). The convenience of taking an oral tablet that has benefits of glucose-lowering, weight loss, blood pressure reduction, and CV and renal protection is hard to beat. That said, we do very much think that commercial performance is lagging far behind thought leader enthusiasm for SGLT-2s, and our sense is that the class overall has been hindered by ongoing safety concerns, particularly with regard to the amputation signal seen in CANVAS – AZ said as much in its update.

Pooled SGLT-2 Inhibitor Sales (1Q13-2Q18)

Financial Highlights

2. Januvia Franchise Sells $1.5 Billion (+1% YOY), Falling 10% YOY in US to $712 Million and Rising 14% YOY OUS to $822 Million

Global sales of DPP-4 inhibitor Januvia (sitagliptin) and fixed-dose combination Janumet (sitagliptin/metformin) were essentially flat YOY (+1%) at $1.5 billion. Notably, this very marginal gain occurred against an easy comparison of 7% YOY loss in 2Q17. Sequentially, the Januvia franchise grew 8% in 2Q18, but this also occurred against an easy comparison of a 7% sequential decline in 1Q18 (to $1.4 billion). Taking a broader look at Januvia (see the graph below), the consistent and paradoxically stable fluctuation of revenue over the past ~seven years around a very high base of ~$6 billion annually is evident. YOY margins over the past six quarters have been -6%, -7%, -2%, +1%, +7%, and +1%. Januvia is not alone in this trend; the DPP-4 class as a whole follows this ebb and flow, a trend that is actually driven by Januvia since Merck’s product captures ~60% market share by value. All this said, Januvia continues to be an absolute blockbuster in the diabetes market – let’s not forget that this franchise alone made Merck the second-largest diabetes company until Lilly overtook it last year (Novo Nordisk remains solidly in first place).

• Pricing pressures continue to suppress growth in the US. US Januvia franchise revenue fell 10% YOY to $712 million in 2Q18 (from $789 million in 2Q17). These stateside sales rose 8% sequentially from $657 million in 1Q18, when revenue declined 10% QOQ. This represents a pattern of sluggish showings from the Januvia franchise in the US market, building on YOY losses of 6% in 1Q18, 9% in 4Q17, 2% in 3Q17, 11% in 2Q17, and 9% in 1Q17. On today’s call, management again mentioned intensified pricing pressure in the US, despite good volume (indeed, likely volume gains). They elaborated during Q&A that it only gets more tough from year to year. It’s no secret that pricing pressure is rampant throughout diabetes, adversely affecting manufacturers’ net price on products (because of higher rebates flowing out to PBMs), and negatively impacting patients when there’s less for companies to invest in R&D and patient assistance funding. Merck’s Patient Assistance Program (PAP) for Januvia is commendable, in our view; in fact, it received one of the two highest scores (alongside J&J’s) in diaTribe’s comprehensive look at diabetes PAPs. In sum, there are likely two major factors underlying the discrepancy between US volume gains and US revenue losses for Januvia and Janumet: (i) high rebates paid to PBMs/payers and (ii) generous patient discounts.

• Growth OUS continues to drive the overall success of the Januvia franchise, buoying losses in the US. OUS franchise sales grew 14% YOY to $822 million in 2Q18 from a base of $722 million in 2Q17. OUS revenue also rose 7% sequentially from $768 million in 1Q18. Management remained positive about the franchise’s development in OUS markets, commenting on ongoing launch in China, which they view as a significant growth opportunity.

Total Januvia Franchise Sales (1Q17-2Q18)

3. SGLT-2 Steglatro Franchise Posts an Estimated $37 Million in First Full Quarter on the Market

Merck did not break out sales for the Pfizer-partnered SGLT-2 inhibitor Steglatro franchise, but we estimate that ertugliflozin products generated ~$37 million in revenue for 2Q18. This estimate is based on total diabetes sales of $1.57 billion for 2Q18 (located in a footnote), minus Januvia sales of $949 million and Janumet sales of $585 million, and it includes revenue for Steglatro (ertugliflozin), Steglujan (ertugliflozin/sitagliptin), and Segluromet (ertugliflozin/metformin). Sales of $37 million would represent more than a quadrupling in revenue from 1Q18, when we estimated ~$8 million via the same methodology. It’s important to note that the launch of the Steglatro franchise only occurred about one-third of the way through 1Q18 (late January for Steglatro + Steglujan, February for Segluromet), so $8 million represents more like a half quarter of revenue. That being said, Steglatro was the major growth driver in Merck’s overall diabetes portfolio in 2Q18, contributing a 62% share of growth, though Steglatro obviously has much more headroom than the company’s blockbuster DPP-4 inhibitor. We consider this second quarter performance a respectable showing for Steglatro, given that it’s a new product entering a class with slowed underlying growth and three established products (J&J’s Invokana, Lilly/BI’s Jardiance, and AZ’s Farxiga). Moreover, Merck reps have acknowledged that reimbursement is currently low and will have to be built up slowly and steadily over the course of the year; hopefully (and in all likelihood), Steglatro will secure a spot on major US formularies for 2019, when volume/sales will really take off. As we understand it, all three ertugliflozin products were FDA-approved so late in 2018 that Merck/Pfizer missed the contracting cycle for 2018. We would have loved any comment from Merck today on what’s allowing for Steglatro gains, and we wonder if the product’s lower list price has anything to do with it – at this point, we can only speculate. Merck/Pfizer issued a joint statement when Steglatro was approved establishing the list price as $8.94/day, which is meaningfully lower than the ~$17/day for existing SGLT-2 inhibitors. In 1Q18, we confirmed with a company rep that Merck would report total global franchise sales going forward, but per the original agreement for this partnership, Merck and Pfizer will split revenues 60/40, which suggests that Pfizer collected ~$15 of this $37 million in 2Q18.

• Steglatro was, once again, absent from prepared remarks and Q&A. Aside from a small cameo in a question about Januvia (below, and not addressed in the answer), you might not know Steglatro was on the market from Merck’s call materials. The company is certainly very focus on oncology, but we’re nonetheless fairly surprised at this continued silence; no mention was made on the 1Q18 call either, following a delayed acknowledgement of FDA approval of ertugliflozin by both Merck and Pfizer – this seems like a strange way to approach the launch of a product into a class that sold $3.5 billion last year. Although it is quite likely (and we expect) that significant steps are being taken behind the scenes to ensure the success of Steglatro (we noticed a ramped-up exhibit hall presence at ADA 2018), the otherwise muted strategy remains puzzling. For our part, we remain optimistic about this launch, especially in terms of pricing, as the franchise’s list prices remain considerably lower than its competitors. SGLT-2 inhibitors represent some of the most advanced therapy options available to people with diabetes today (powerful glucose-lowering and weight loss, reductions in blood pressure, possible CV/renal protection, easy oral administration, very manageable side-effects, etc.), and expanded choice in this class in a victory for patients.

• VERTIS CV, the CVOT for ertugliflozin, is now expected to complete in September 2019 (moved up slightly from October 2019). It’s hard to overstate the importance of this trial: Lilly/BI’s Jardiance already has a CV indication on its label, and J&J has submitted an sNDA for an indication for Invokana – though FDA recently delayed a decision for the latter by three months. AZ’s DECLARE trial for Farxiga will report topline results by the end of the year. In our observation, a class effect for cardioprotection with SGLT-2s is increasingly accepted by thought leaders; however, it is imperative that ertugliflozin demonstrate cardioprotection to support an indication of its own. Without compelling CV results, we can’t imagine the product gaining significant market access without offering crippling rebates (and we can’t imagine many providers being eager to prescribe it, either). We do wonder whether the late market entry and CVOT results for Steglatro will hamper its future earning potential. Nevertheless, we still believe there is plenty of room for all four available SGLT-2s to thrive on the market, offering plenty of choice for patients/providers. There is ample headroom for the SGLT-2 market to grow – according to a Diabetes Care article published last year, only 7% of second-line diabetes prescriptions in the US go to an SGLT-2 inhibitor (the majority 46% still go to a sulfonylurea).

4. Standalone Januvia Sales Hold Steady at $949 Million; Revenue Falls 7% YOY in US ($503 Million) and Rises 10% OUS ($446 Million)

Global revenue from standalone Januvia (sitagliptin) was stagnant at $949 million in 1Q18, as performances US vs. OUS offset one another. Sequentially, revenue rose 8% against an easy comparison of 6% QOQ decline to $881 million in 1Q18. There was, as usual, a clear disparity between US and OUS sales: OUS revenue grew 10% YOY and 7% sequentially to $446 million, while US sales fell 7% YOY to $503 million (from $541 million in 2Q17), rebounding 8% QOQ from an equivalent loss in 1Q18. Management continues to cite pricing pressure in the US as driving down realized price for Januvia, while expansion of DPP-4 inhibitors overall in emerging markets like China buoy losses in more established geographies.

Standalone Januvia Sales (1Q07-2Q18)

5. Janumet Climbs 4% YOY to $585 Million; Falls 16% YOY in US to $209 Million But Rises 19% YOY OUS to $376 Million

Janumet sales of $585 million grew 4% YOY from a base of $563 million in 2Q17, also rising 8% sequentially from $544 million in 1Q18. The fixed-dose combination (sitagliptin + metformin) drove 37% of growth in Merck’s diabetes portfolio in 2Q18. International uptake of Janumet continues to far outpace sales in US markets ($376 million vs. $209 million); growth OUS was impressive at 19% YOY, but that was offset by a 16% YOY decline in the US. Sequentially, Janumet sales in US markets grew 9% against an easy comparison of 14% decline between 4Q18 and 1Q18 ($192 million). Meanwhile, OUS sales climbed 7% sequentially from $352 million in 1Q18, when revenue fell 3% sequentially. Management emphasized “demand-driven growth” around their DPP-4 inhibitor business ex-US, offset by drops is US revenue in the face of pricing pressure. We suspect that this strong international performance is especially driven by high uptake in Asian countries, including and especially Japan, where the class is particularly popular. Moreover, as more advanced branded diabetes products enter the market (DPP-4s are certainly facing tough competition from GLP-1s and SGLT-2s), our sense is that combination products (with both metformin and SGLT-2 inhibitor) are becoming more important for DPP-4 inhibitor franchises, offering an edge on convenience and/or efficacy.

Janumet Sales (2Q07-2Q18)

Pipeline Highlights

6. Sitagliptin/Ipragliflozin Fixed-Dose Combination (MK-0431J) Approved in Japan as Sujanu

MK-0431J (sitagliptin + ipragliflozin) was approved (slide 4) in Japan, following successful phase 3 trials in Japanese participants in 2016 and 2017. This joins an emerging class of DPP-4/SGLT-2 fixed-dose combinations. The candidate’s market entry could offer a small boost to Merck’s diabetes revenue (it was developed in collaboration with Astellas), and we’ll be interested in any future comments on uptake from Merck. We’ve noted continued resistance to fixed-dose and fixed-ratio combination therapies for a variety of reasons (reimbursement and cost, rigidity, unfamiliarity) in the US; we wonder how the situation might be different or the same in Japan. No other updates were given on Merck’s diabetes pipeline candidates, but we did notice that MK-8251, a GLP-1/glucagon dual agonist, has been removed from Merck’s pipeline page following the termination of a phase 2 trial last year. The table below summarizes key details on current diabetes drug candidates being developed by Merck.

Merck Diabetes Pipeline Summary

Select Questions and Answers

Q: On Januvia and Janumet, revenue is a little bit higher than we were expecting for the quarter. Can you talk a little bit about the pricing environment? It seemed as though, in oral antidiabetic drugs, we're continuing to see a gross-to-net adjustment spike and the pricing pressure, but has it stabilized a little bit? Or are you guys just including your SGLT-2 combo in that line?

Mr. Kenneth Frazier (CEO): As I said before, outside the U.S., we continue to see strong growth, and most of that is offset by the pricing pressure that we see in the US. And as I said for the last couple of years, each year is tougher than the last year. This year, there's more pricing pressure than there was last year, and I believe, next year, there'll be more pricing pressure than there is this year. The good news is we are seeing growth outside of the US, and we're in the middle of launching in China, for example, where we think there's still growth opportunity. So what's happening is the growth outside the US is offset by the US pricing pressure, albeit that we still continue to see good volume in the US.

--by Martin Kurian, Ann Carracher, Payal Marathe, and Kelly Close