Memorandum

Merck 1Q17 – Januvia franchise falls 6% YOY to $1.3 billion, driven by 9% YOY decline in the US; Management positions ertugliflozin submission to FDA as sign of confidence in diabetes business – May 2, 2017

Executive Highlights

  • In a tough quarter for Merck Diabetes, Januvia franchise sales fell 6% YOY in 1Q17 to $1.3 billion – the second-largest quarterly YOY drop since launch in 2006. Management explained this disappointing financial performance in terms of a $70 million stocking that took place in 1Q16 (making for a difficult YOY comparison to 1Q17), though we expect some of the decline is also due to competitive pressure for DPP-4 inhibitors vs. GLP-1 agonists and SGLT-2 inhibitors.  
  • A bright spot for the company in 1Q17 was the FDA’s acceptance of New Drug Applications for Pfizer-partnered SGLT-2 inhibitor ertugliflozin, as well as fixed-dose combinations of ertugliflozin with Januvia and with metformin. Management also shared that the VERTIS CV cardiovascular outcomes trial for ertugliflozin is fully-enrolled, with an expected completion date of October 2019.
  • There was less discussion of diabetes during the 1Q17 call compared to what is typical for Merck, both in terms of prepared remark and Q&A. Accordingly, management did not mention other diabetes pipeline products, including biosimilar insulin glargine candidate MK-1293 which is currently under FDA review and is also facing a patent infringement lawsuit from Sanofi.

Merck’s 1Q17 earnings call, led by CEO Mr. Ken Frazier, took place early Tuesday morning. We brought you a First Look shortly after the call wrapped-up (those of you with our handy Closer Look app saw the notification!), and we’ve now updated this page with our in-depth coverage, complete with graphs and a pipeline summary table.

It was a disappointing quarter overall for Merck Diabetes, with an underwhelming financial performance by the Januvia franchise. Discussion of diabetes during prepared remarks was limited, and there was only one question on diabetes during Q&A. Read on through our top five highlights below for more details and commentary.

Financial Highlights

1. The Januvia franchise – including standalone DPP-4 inhibitor Januvia (sitagliptin) and fixed-dose combination Janumet (sitagliptin/metformin) – posted $1.3 billion in sales, which represents a 6% year-over-year (YOY) decline as reported (5% operationally). This is the second-largest YOY decline in Januvia franchise sales since its launch in 2006 – the largest drop occurred relatively recently as well (-12% in 4Q15). Management attributed the disappointing decrease in 1Q17 to the timing of customer buy-in in the US – more specifically, a $70 million stocking took place in 1Q16 that accounts for a majority of the difference between 1Q16 revenue of $1.4 billion and 1Q17 revenue. Indeed, US sales in 1Q17 fell 9% YOY to $702 million against a relatively tough comparison (US sales rose 9% YOY in 1Q16). Ex-US sales for the Januvia franchise were essentially flat in 1Q17, falling 1% YOY to $634 million. Despite the downturn, management continued to emphasize Januvia’s market leading status among DPP-4 inhibitors, with >70% market share by value in the US and 65% market share globally. That said, global sales of the underlying DPP-4 inhibitor class have been sluggish or fluctuating of-late, reflecting commercial challenges such as competition from GLP-1 agonists and SGLT-2 inhibitors. We hope to see recovered sales growth for the Januvia franchise in 2Q17 and beyond, and we think Merck/Pfizer’s sitagliptin/ertugliflozin combination will be a significant opportunity.

2. Global sales of standalone Januvia fell 7% YOY to $839 million in 1Q17. This performance was stable across US and ex-US markets, with US sales falling 8% YOY to $507 million and international sales falling 7% YOY to $332 million.

3. Global sales of fixed-dose combination Janumet fell 2% YOY to $496 million. US revenue totaled $195 million, down a marked 14% YOY. Ex-US revenue grew 8% YOY to $302 million.

Pipeline Highlights

4. Management highlighted the FDA’s acceptance of New Drug Applications (NDAs) for Pfizer-partnered SGLT-2 inhibitor ertugliflozin, fixed-dose ertugliflozin/metformin, and fixed-dose ertugliflozin/sitagliptin. Assuming a standard 10-month review process, an FDA decision is anticipated by January 2018. Management also shared that the VERTIS CV trial for ertugliflozin is now fully-enrolled, with data expected in 2019 (the CVOT is expected to complete in October 2019 according to ClinicalTrials.gov). Management positioned the ertugliflozin franchise as a sign of Merck’s confidence in its diabetes business (in light of a disappointing quarter for Januvia). We’re heartened m to see the company expanding into other therapy classes for diabetes, reinforcing their commitment to patients and healthcare providers. We expect Merck’s familiarity among primary care providers will be a strong advantage when it comes time to launch the ertugliflozin franchise.

5. There was no mention of other candidates in Merck’s diabetes pipeline, including biosimilar insulin glargine MK-1293 (filed with the FDA in 3Q16 and currently facing a patent infringement lawsuit from Sanofi) and glucose-responsive insulin MK-2640 (phase 1 trial completed in August 2016).

Financial Highlights

1. Januvia Franchise Down 6% YOY to $1.3 Billion, Driven by 9% YOY Decline in the US

The Januvia franchise – including standalone DPP-4 inhibitor Januvia (sitagliptin) and fixed-dose combination Janumet (sitagliptin/metformin) – posted $1.3 billion in sales, which represents a 6% year-over-year (YOY) decline as reported (5% operationally). This is the second-largest YOY decline in Januvia franchise sales since its launch in 2006 – the largest drop occurred relatively recently as well (-12% in 4Q15). Management attributed the disappointing decrease in 1Q17 to the timing of customer buy-in in the US – more specifically, a $70 million stocking took place in 1Q16 that accounts for a majority of the difference between 1Q16 revenue of $1.4 billion and 1Q17 revenue. Indeed, US sales in 1Q17 fell 9% YOY to $702 million against a relatively tough comparison (US sales rose 9% YOY in 1Q16). Ex-US sales for the Januvia franchise were essentially flat in 1Q17, falling 1% YOY to $634 million. Sequentially, worldwide revenue from Merck’s DPP-4 business was down 12% from a base of $1.5 billion in 4Q16.

  • Despite the downturn, management continued to emphasize Januvia’s market leading status among DPP-4 inhibitors, with >70% market share by value in the US and 65% market share globally. Management also pointed to 3% YOY growth in Januvia’s TRx, or share of total DPP-4 inhibitor prescriptions in the US, in 1Q17 vs. 1Q16. That said, global sales of the underlying DPP-4 inhibitor class have been sluggish or fluctuating of-late, reflecting commercial challenges such as competition from GLP-1 agonists and SGLT-2 inhibitors. We very much hope to see recovered sales growth for the Januvia franchise in 2Q17 and beyond. Despite more advanced classes of therapy like GLP-1 and SGLT-2, we see a crucial role for DPP-4 inhibitors to play in diabetes care due to their benign safety/tolerability profile, coupled with a familiarity factor among primary care providers especially. Januvia has been one of the drivers of whole class growth, and we think Merck/Pfizer’s sitagliptin/ertugliflozin combination will be another significant opportunity. Despite the disappointing growth (or lack thereof) for 1Q17, Januvia remains a giant in the diabetes field as the most profitable non-insulin drug on the market – we expect that lessons learned by Merck through its Januvia experience will translate well to its ertugliflozin franchise. Additionally, Januvia patents begin to expire in 2022 and we think sitagliptin has enormous potential as a generic drug.
  • Notably, there was no mention of the FDA’s Complete Response Letter for inclusion of TECOS data on the labels for Januvia franchise products (though this matches the very limited discussion of diabetes in general). These CVOT results were resoundingly neutral, but importantly, inclusion on the label could have put to bed concerns about the DPP-4 agent being associated with heart failure. In contrast, the SAVOR-TIMI trial of AZ’s Onglyza (saxagliptin) found a worrisome 27% increased risk for heart failure hospitalization (p=0.007), and the EXAMINE trial for Takeda’s Nesina (alogliptin) found a similar heightened risk for heart failure, whereas TECOS reported a neutral hazard ratio for this endpoint of 1.00 (95% CI=0.8-1.20). The CARMELINA and CAROLINA CVOTs for Lilly/BI’s Tradjenta (linagliptin) are expected to complete in January 2018 and March 2019, respectively.

Figure 1: Total Januvia Franchise Sales (1Q07-1Q17)

2. Standalone Januvia Sales Fall 7% YOY to $839 Million

Global sales of standalone Januvia fell 7% YOY to $839 million in 1Q17. This performance was stable across US and ex-US markets, with US sales falling 8% YOY to $507 million and international sales falling 7% YOY to $332 million. Sequentially, worldwide revenue from the product fell 10% against an easy comparison, given the 6% sequential decline in 3Q16 and the 7% sequential decline in 4Q16. We’d be curious to know how much of this sluggish US performance is due to pricing pressure surrounding diabetes drugs. Patient discount programs, segment mix with more Medicaid vs. managed care patients, and rebates have all been cited by manufacturers as a cause for lower net sales despite stable or increased prescription volume in other drug classes. Given that Januvia’s TRx share grew 3% YOY in 1Q17, according to Merck management, we expect the lower revenue is driven by lower net realized price for the product. That said, this is speculation – management’s commentary during the earnings call was constrained to the one-liner describing a $70 million stocking took place in 1Q16.

Figure 2: Standalone Januvia Sales (1Q07-1Q17)

3. Janumet Sales Fall 2% YOY to $496 Million

Global sales of fixed-dose combination Janumet fell 2% YOY to $496 million. US revenue totaled $195 million, down a marked 14% YOY. Ex-US revenue grew 8% YOY to $302 million, though this occurred against a relatively easy comparison, as ex-US Janumet sales fell 6% YOY in 1Q16. Combination products have been key growth drivers for many DPP-4 inhibitor franchises, and we’d certainly like to see a high number of patients benefit from a convenient, single tablet of sitagliptin and metformin for improved glycemic control. We imagine Merck’s focus may shift somewhat to the Pfizer-partnered fixed-dose combination of SGLT-2 inhibitor ertugliflozin with sitagliptin, if this product is approved by the FDA (decision expected by December 2017, according to Pfizer’s 1Q17 update today), given the profound glucose-lowering and weight loss efficacy of SGLT-2 inhibitors (not to mention, their potential cardioprotective effects). Still, we hope the ertugliflozin franchise is a way for Merck to expand its investments in diabetes, not to cannibalize resources allocated to Januvia or Janumet, both of which are supremely helpful therapies for many patients.

Figure 3: Janumet Sales (2Q07-1Q17)

Pipeline Highlights

4. Ertugliflozin: Bright Spot on the Regulatory Front; VERTIS CV Fully-Enrolled

Management highlighted the FDA’s acceptance of New Drug Applications (NDAs) for Pfizer-partnered SGLT-2 inhibitor ertugliflozin, fixed-dose ertugliflozin/metformin, and fixed-dose ertugliflozin/sitagliptin. Assuming a standard 10-month review process, an FDA decision is anticipated by January 2018. Management also shared that the VERTIS CV trial for ertugliflozin is now fully-enrolled, with data expected in 2019 (the CVOT is expected to complete in October 2019 according to ClinicalTrials.gov). It was great to hear this confirmation that VERTIS CV is on schedule. As CVOTs gain more traction in the diabetes field, it is our view that new diabetes drugs will have to demonstrate CV benefits on top of glucose-lowering capabilities – this is especially true for a later market entry like ertugliflozin, which will be the fourth major SGLT-2 inhibitor on the market if approved. Speculation has been running high on a possible cardioprotective class effect for SGLT-2 inhibitors, following positive results from EMPA-REG OUTCOME for Lilly/BI’s Jardiance (empagliflozin). The CANVAS CVOT for J&J’s Invokana (canagliflozin) is slated to report at ADA 2017, and the DECLARE trial for AZ’s Farxiga (dapagliflozin) is expected to complete in April 2019. Management positioned the ertugliflozin franchise as a sign of Merck’s confidence in its diabetes business (in light of a disappointing quarter for Januvia). We’re heartened to see the company expanding into other therapy classes for diabetes, reinforcing their commitment to patients and healthcare providers. We expect Merck’s familiarity among primary care providers will be a strong advantage when it comes time to launch the ertugliflozin franchise.

5. No Mention of Biosimilar Insulin Glargine or Glucose-Responsive Insulin Candidates

There was no mention of other candidates in Merck’s diabetes pipeline, including biosimilar insulin glargine MK-1293 (filed with the FDA in 3Q16 and currently facing a patent infringement lawsuit from Sanofi) and glucose-responsive insulin MK-2640 (phase 1 trial completed in August 2016). We’re extremely excited for Merck to expand its diabetes portfolio by entering the insulin commercial landscape. Lilly/BI launched their biosimilar insulin glargine Basaglar in the US to 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 manufacturing. 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. Turning to the glucose-responsive insulin candidate, we were thrilled to note that Merck’s phase 1 study of MK-2640 concluded in August 2016 after several delays (reflecting the challenges to glucose-responsive insulin). Unfortunately, the company has been completely silent on the data. Regardless of the findings – whether positive, negative, or neutral – these results 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

Product

Product Details

Status

Timeline

MK-1293

Biosimilar insulin glargine (Sanofi’s Lantus)

Under review

New Drug Application filed August 2016; Sanofi files patent infringement lawsuit September 2016; Phase 3 data reported at ADA 2016

MK-8835

SGLT-2 inhibitor ertugliflozin

Under review

FDA and EMA accept filings 1Q17; Other regulatory filings to come in 2017; Phase 3 data reported at EASD 2016

MK-8835A

Ertugliflozin/sitagliptin (Merck’s Januvia)

Under review

FDA and EMA accept filings 1Q17; Other regulatory filings to come in 2017; Phase 3 data reported at EASD 2016

MK-8835B

Ertugliflozin/metformin

Under review

FDA and EMA accept filings 1Q17; Other regulatory filings to come in 2017; Phase 3 data reported at EASD 2016

MK-0431J

Sitagliptin/ipragliflozin

Phase 3

One phase 3 trial in Japanese participants completed November 2016; Another completed March 2017

MK-8521

GLP-1/glucagon receptor co-agonist

Phase 2

Phase 2 trial expected to complete April 2017, but still ongoing according to ClinicalTrials.gov

MK-2640

Glucose-responsive insulin

Phase 1

Phase 1 trial completed August 2016 following several delays

 

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