Merck 3Q14 – Januvia franchise grows 5% to $1.4 billion, driven by increased company focus on diabetes – October 27, 2014

This morning, Merck CEO Mr. Ken Frazier led the company’s 3Q14 financial results call. Below are our top five highlights from the presentation with an honorable mention, followed by Q&A.

1. Globally, the Januvia franchise grew 5% year-over-year (YOY) to $1.4 billion, driven largely by sales growth across multiple geographies (except Japan); Mr. Frazier commented that Merck has reallocated resources to increase its investment in Januvia. We were glad to hear this about Merck’s top drug franchise.

2. During Q&A, management suggested that Januvia will continue to have good formulary access, and dispelled concerns that the franchise would not be included on United Healthcare’s 2015 Medicare Part D formulary.

3. No updates were provided on the call on any of Merck’s diabetes pipeline candidate, which include: (i) Merck/Samsung Bioepis’ phase 3 insulin glargine candidate (MK-1293); (ii) Merck/Pfizer’s phase 3 SGLT-2 inhibitor ertugliflozin (MK-8835); (iii) Merck’s phase 3 once-weekly DPP-4 inhibitor omarigliptin (MK-3102); and (iv) the preclinical “smart” glucose-responsive insulin (L-490) – however, we recently learned outside of the call that there is a new Merck-sponsored study evaluating an insulin candidate on ClinicalTrials.gov: Identifier: NCT02269735.

4. Although it was not discussed during the call, we saw positive phase 3 data results for Merck’s once weekly DPP-4 inhibitor omarigliptin at EASD, which demonstrated a comparable safety and efficacy profile to Januvia.

5. Regarding TECOS (the CVOT for Januvia), management confirmed that the study’s last patient visits will occur by the end of 2014. TECOS seems to be making an increased number of investors nervous; analysts ballpark negative news at prompting a drop of ~20% in franchise sales.

Top Five Highlights

1. Global sales of the DPP-4 inhibitor Januvia (sitagliptin) and Janumet (sitagliptin/metformin) grew 5% year-over-year (YOY) as reported and in constant currencies to $1.4 billion in 3Q14. This represents an upswing in momentum relative to recent quarters, and the highest year-over-year growth rate for the franchise since 2Q13 (see our table below) though still a sequential decline. As a partial explanation for the improved result, even as the overall DPP-4 inhibitor class appears to be mired in a slowdown, we learned during prepared remarks that Merck reallocated resources and invested significantly in the Januvia franchise this year and is looking to “compete to win” in diabetes, along with three other focus areas.  

• Revenue growth in 3Q14 was driven by growth in both US and international markets. The US saw growth of 5% while international markets saw growth of 4%, driven by Europe and emerging markets. Sales in Japan (a market that uses DPP-4 inhibitors to a uniquely high degree) suffered due to the government’s regular 10% re-pricing that occurred in April. Management also acknowledged that Japan’s overall competitive environment for DPP-4 inhibitors will pose challenges, but expressed confidence that Merck will deliver global sales growth for the Januvia franchise in 2014 (the franchise is up 3% in the first nine months of the year compared to the first nine months of 2013). Also during the call, management shared that sales trends in the month of October have been encouraging, which we felt was a good sign.
• For context, in 3Q14, Lilly’s Tradjenta grew 22% to $79 million, from a much lower base, of course (it is a newer product). We will learn more about other DPP-4 inhibitors’ performance when Novartis, Takeda, and AZ report on October 28, October 30, and November 6, respectively.
• Although the Januvia franchise is far from its regular double-digit growth seen in 2012 and previously, Merck has done an impressive job in preserving its juggernaut’s share vs. an increasingly crowded field of competitors. During Merck’s 2Q14 call, management highlighted that Merck has maintained about a 65% share of the DPP-4 inhibitor market globally and about a 75% share within the US (nearly the same share percentages reported during Merck’s May 2014 investor briefing [the US share was indicated to be 74% in May]).
• Similar to the trends seen in previous quarters, Merck’s sitagliptin/metformin fixed-dose combination Janumet performed significantly better than standalone Januvia. Merck did not report these results; we obtained them through speaking with management afterward. To summarize, in 3Q14, Janumet global sales of $505 million rose 14% YOY and Januvia global sales of $933 million rose 0.6% - notably, although Janumet was clearly much stronger, this is Januvia’s first quarter seeing a slight growth rather than a decline as the drug saw declines of 1% and 3% in 2Q14 and 1Q14, respectively. We find Janumet’s strong sales growth unsurprising since the combination is priced the same as Januvia, and because, although it can require a bit of complexity in terms of titration for some patients, Janumet’s results in most patients are far better than with Januvia as monotherapy. Such a disparity between the two drugs’ growth trends highlights fixed-dose combinations as an increasingly attractive alternative, due to better efficacy, patient convenience, and the consolidation of copays for patients. 
• There has been a broader slowdown in the DPP-4 inhibitor class in recent quarters potentially due to factors, including: (i) the growing focus on cost-effectiveness by payers; (ii) the increased price competition due to the entry of more competitors; (iii) the introduction of SGLT-2 inhibitors; (iv) the slowdown of patient transfers from TZDs to other oral agents (albeit, due in part to the decreasing number of patients still on TZDs); and (v) the reverberations of the incretin-pancreatitis/pancreatic cancer scare peaking in 2013.
  
  • Keys to reversing this trend will be new longer-acting formulations (see our section on Merck’s phase 3 once-weekly omarigliptin below), combinations, and some good luck on the safety front. Fixed-dose combinations, as shown by Janumet’s strong performance, may be an especially effective approach to reviving this drug class. For example, the prospect of a fixed-dose combination with the partnered SGLT-2 inhibitor ertugliflozin is especially exciting.
• As a reminder, Merck has a unique payment scheme with its distributor in Japan, Ono Pharmaceuticals. The result is that revenue and sequential growth in odd numbered quarters can appear artificially low.

Table 1: Januvia franchise worldwide sales

2. During Q&A, management fielded a question on Januvia’s formulary access for 2015. The question addressed the fact that individuals covered by Part D plans with United Healthcare received a notice that Januvia would not be on formulary for 2015. Management noted that Januvia will continue to have preferred formulary access with the United Healthcare Part D plan in 2015, and that the notice was sent because the contract with United Healthcare was not signed when the carrier filed their 2015 formulary with the CMS. Although the clarification was reassuring, we imagine it might lead to some confusion on the part of covered patients.

• More broadly, management suggested that based on preliminary reviews, Merck expects to have positive formulary access for Januvia in 2015. This was consistent with commentary during the 2Q14 call that formulary positioning for 2015 was “moving forward in a good way.”

3. Disappointingly, Merck provided no major updates on its phase 3 pipeline, which includes the a Samsung-partnered insulin glargine candidate (MK-1293), a “smart” glucose-responsive insulin (L-490), a Pfizer-partnered SGLT-2 inhibitor ertugliflozin (MK-8835), and a phase 3 once-weekly DPP-4 inhibitor omarigliptin (MK-3102); management also provided no updates on the company’s “smart” glucose-responsive insulin (L-490) during the call, but we recently learned of a new Merck-sponsored insulin study on ClinicalTrials.gov: Identifier: NCT02269735.

• Merck/Samsung Bioepis’ insulin glargine candidate has two ongoing phase 3 trials (ClinicalTrials.gov Identifiers: NCT02059161; NCT02059187), with primary completion dates in Marcy/April 2015. As background, this past February, Merck announced its collaboration with Korean biopharmaceutical and biosimilar manufacturer Samsung Bioepis to develop an insulin glargine formulation (a “biosimilar” depending on the regulatory setting). Lilly/BI have their own insulin glargine formulation, which was approved in the EU and “tentatively approved” by the FDA (full approval pending a lawsuit by Sanofi).
• We recently learned that Merck has a phase 1 trial investigating the safety, pharmacokinetics, and pharmacodynamics of insulin candidate MK-2640 on ClinicalTrials.gov: Identifier: NCT02269735. We have been following Merck’s “smart” glucose-responsive insulin candidate (L-490) since the company acquired SmartCells in December 2010 for potential upfront/milestone payments worth over $500 million. The glucose-responsive insulin has received commentary in previous Merck calls but has not progressed into human trials in the past four years. We are not positive if this new trial’s MK-2640 is indeed Merck’s “smart” insulin, but given the lack of specifics, we believe it is. The study is not yet open for participant recruitment, but is slated to start in November 2014 with an estimated completion date of May 2015. Part 1 of the study will evaluate MK-2640 in healthy participants while Part 2 will evaluate the candidate and regular human insulin in participants with type 1 diabetes. The phase 1 trial also appears to be decently sized with an estimated enrollment of 40 participants. As noted at the Merck Investor Briefing this past May, Merck’s current glucose-responsive insulin candidate works through a different mechanism of action than SmartCells used. During the briefing, Merck expressed optimism about the candidate and stated its plan to move the agent into phase 1 testing, though without a specific timeline determined – this new study may be the move into phase 1 that we have been waiting for. 
• Merck/Pfizer’s SGLT-2 inhibitor ertugliflozin currently has nine ongoing trials, of which eight are currently recruiting and one is not yet recruiting (see the table below). In the past, Pfizer management has suggested that ertugliflozin has the potential to be a best-in-class molecule. Beyond the monotherapy, there is reason to be excited by the prospect of a fixed-dose combination of ertugliflozin and Januvia; the combination would almost certainly not be first to market (Lilly/BI’s empagliflozin/linagliptin and AZ’s saxagliptin/dapagliflozin are on a faster timeline), but using the market-leading DPP-4 inhibitor could provide a familiarity advantage.   

Table 2: Phase 3 studies for ertugliflozin

4. Although it was not discussed during the call, we heard positive phase 3 results for Merck’s once-weekly DPP-4 inhibitor omarigliptin at EASD, which demonstrated a comparable safety and efficacy profile to the once-daily Januvia. The 24-week, non-inferiority trial was conducted in Japanese patients (n=414) with type 2 diabetes and compared the safety, efficacy, and tolerability of omarigliptin 25 mg with both placebo and sitagliptin 50 mg. Omarigliptin met the 0.3% A1c margin for non-inferiority, with an efficacy profile comparable to that of sitagliptin – both achieved placebo-adjusted A1c reductions of ~0.8%. Both agents also significantly reduced two-hour post-meal and fasting plasma glucose levels relative to placebo and showed no significant difference in safety profile. Omarigliptin was weight neutral, similar to sitagliptin. Comparable clinical profiles allow the different administration frequencies to stand out as the primary differentiator between the products, and we imagine that once-weekly convenience will be valuable for many (though perhaps not all) patients. Merck intends to file for approval by the end of 2014 in Japan, with other geographies to follow.

• Merck’s chief competitor originally appeared to be Takeda’s once-weekly DPP-4 inhibitor trelagliptin, but Takeda has decided to not pursue a regulatory filing in the US and EU. Takeda submitted trelagliptin in Japan this past March, but stopped development due to the high costs, especially that of CVOTs required in the US.
• A Merck-sponsored discrete-choice study (which we covered at ADA 2013) suggests that patients (particularly younger patients) value taking a once-weekly DPP-4 inhibitor such as omarigliptin, although the degree to which this is true remains hard to call. Patients in the study (particularly those under 45 years) appreciated the reduction in pill burden regardless of whether they were taking multiple daily therapies, but were only willing to pay a few dollars a month for the added convenience. Given that patients don’t pay for most of the drug, we don’t think patient view of cost matters as much as patients’ adherence associated with omarigliptin (since this impacts the drug’s real-world efficacy, and thereby the value payers ascribe to the agent); to be sure, if it is meaningfully higher, payers will be incredibly interested in it as adherence is such a significant problem related to patient care with all therapies. Targeting this therapy to patient populations who show better adherence (which we assume will be virtually all – but some to a higher degree!) may provide the best chances for success: Merck believes that omarigliptin may be particularly attractive to younger patients, and could potentially displace sulfonylureas as a first-line therapy in those who cannot tolerate metformin.

Table 3: Merck’s diabetes drug pipeline

5. Management fielded two questions about TECOS (the CVOT for Januvia) during Q&A, on the timing of results and the issue of heart failure. Management confirmed that the study’s last patient visit will occur by the end of the year (consistent with guidance during Merck’s 2Q14 presentation), with results hopefully announced in 2015. This is also consistent with the study’s estimated primary completion date of December 2014 on ClincalTrials.gov (Identifier: NCT00790205).

• Regarding what the study might show regarding heart failure, management highlighted that the Data Safety and Monitoring Board is aware of the theory of a class effect but has not recommended any change to the study based on what it has seen – this does provide a modicum of reassurance. While everyone has their eyes on TECOS (the next DPP-4 inhibitor CVOT to report) due to the increased risk of heart failure seen for other DPP-4 inhibitors (namely AZ’s Onglyza [saxagliptin] in the SAVOR trial), the Januvia franchise’s growth in 3Q14 and October 2014 indicates that the majority of providers are still comfortable with the class’ benefit/risk balance, at least based on the current data. However, a finding of increased risk regarding heart failure (or any other meaningful endpoint) will be a major blow against the franchise, as the appeal of DPP-4 inhibitors is based on their excellent safety and tolerability profile.

Honorable Mention

• Merck CEO Mr. Ken Frazier was named “Corporate Executive of the Year” by Black Enterprise magazine in August. The article highlights Mr. Frazier’s successes in driving innovation, ensuring access, and emphasizing exceptional customer service. He is a total powerhouse so we were not at all surprised by the accolade.

Questions and Answers

Q: On TECOS, is it possible you will have those topline results by late 2014 and how will you handle data disclosure when you do have those results?

A: I’ll remind you that this is a study that is coordinated by academic groups. They are managing the study but we should have the last patient’s last visit by the end of this year and we hope that the the data will be presented in 2015. That's all we know about it. As I mentioned before, the Data Safety Monitoring committee is overseeing the study as well but we don’t know anything more than that.

Q: We're just interested on your thoughts on TECOS and the risk of heart failure with JANUVIA. There's obviously been a lot of discussion around this point as of late and we would like to just get Merck's perspective on the risk associated with that study.

A: With respect to TECOS, you know, I think that we do expect that the final patient visit will occur by the end of the year. This is, of course, a study that's being conducted and led by academic institutions, so we'll be made aware of those data. I think it's important to recognize that a data safety and monitoring board has been following this study extremely carefully. Thus the observations that have been made in other studies employing regimens to treat diabetes are well known to the data safety monitoring board. The last data safety monitoring board review was in December of last year. Given that the fact that the DSMB came back and said the study should be continued without change provides some reassurance with respect to the overall conduct of the study. It's a large study and provides important answers to questions about the meaningfulness of intervention with sitagliptin in patients with type 2 diabetes.

Q: From what we understand, I think that Januvia and Janumet, starting in 2015, is not going to be available to people with United Healthcare commercial plans. Can you just confirm if that is indeed the case or if there's been a change there? I’m assuming losing one plan is immaterial to you guys, but are there any other changes to the access of the franchise that we should be aware of as you start thinking about 2015?

A: Januvia continues to have good access in 2014, and based upon preliminary reviews in 2015 we expect to continue to have good access. Januvia is still on formulary for the United Part D plan in 2015 and continues to have preferred access. The contract with United was signed recently, but since it had not been signed when United filed their 2015 formulary with CMS, the United Part D website and CMS required notice to insurees that did not list Januvia as an formulary, but I just want to repeat that it still on formulary for Part D in 2015.

-- by Melissa An, Manu Venkat, and Kelly Close