Merck 3Q15 – Januvia grows 10% YOY to $1.6 billion; Pfizer-partnered SGLT-2 inhibitor ertugliflozin completes phase 3 enrollment; Merck commits to regulatory filings of Samsung-partnered insulin glargine candidate – November 4, 2015

This morning, Merck held its 3Q15 financial update in a call led by CEO Mr. Ken Frazier. Below are our top five highlights from the call, followed by Q&A.

1. Globally, Merck’s DPP-4 inhibitor franchise (including Januvia [sitagliptin] and Janumet [sitagliptin/metformin]) grew 10% year-over-year (YOY) as reported to $1.6 billion in 3Q15. Sequentially, the franchise dropped 1% as reported.

2. Management announced that all 11 of Pfizer-partnered SGLT-2 inhibitor ertugliflozin’s phase 3 studies have completed enrollment, with data expected to roll out in 2016.

3. In addition, the company stated its commitment to regulatory filings of its Samsung-partnered insulin glargine candidate (MK-1293), although no further details were provided.

4. In light of the positive EMPA-REG results for Lilly/BI’s Jardiance (empagliflozin), management expressed confidence in the DPP-4 inhibitor class and noted that Merck may consider redesigning ertugliflozin’s CVOT.

5. Management highlighted that once-weekly DPP-4 inhibitor omarigliptin was approved in Japan and plans to file the drug in the US by the end of the year (as we learned in the 2Q15 update).

Top Five Highlights

1. Globally, Merck’s DPP-4 inhibitor franchise (including Januvia [sitagliptin] and Janumet [sitagliptin/metformin]) grew 10% year-over-year (YOY) as reported to $1.6 billion in 3Q15. Sequentially, the franchise dropped 1% as reported. Management expressed enthusiasm over Januvia, stating that the company “restored the Januvia franchise to growth.” Certainly, 3Q15’s 10% YOY growth represents the franchise’s largest growth since 2012, as YOY growth has not exceeded 5% since then. The company, however, noted that “timing of customer buying” benefitted 3Q15 revenues by ~$100 million due to an increase in price in 3Q14. Despite this advantage, management stated that the more reflective trends in total prescription volume growth remain strong, with a growth of ~4%. In addition, much of the franchise’s growth was driven by US sales, which grew 22% YOY to $902 million. On the other hand, ex-US sales declined 3% YOY to $674 million. Please see the table below for more on recent quarters’ trends.

• Notably, both Januvia and Janumet experienced significant YOY growth at 9% and 11%, respectively, as reported. Janumet has been driving the franchise’s growth for recent quarters, while standalone Januvia revenues have often remained flat or slightly declined. While the 3Q15 growth of Janumet continued to exceed that of Januvia, Januvia’s growth is similarly the greatest we have seen from Januvia since 2012.                  
• While management surprisingly did not highlight the TECOS results, we would assume that Januvia’s growth was somewhat driven by the spot-on neutrality of the findings. The CVOT’s results were a focus of Merck’s 2Q15 call and rightfully so – we expect that Januvia’s dominant position within the DPP-4 inhibitor class can be bolstered by these positive data. With AZ’s Onglyza (saxagliptin) and Takeda’s Nesina (alogliptin) (although to a lesser extent) blemished by the heart failure question, TECOS’ neutral heart failure results make it a reassuring choice for prescribers. Overall however, we do see these heart failure results as good for the class as a whole, as it increasingly looks like the signal in SAVOR was a matter of chance (check out our coverage of the EMDAC meeting on the results of SAVOR and EXAMINE). In the context of a fairly homogeneous drug class, however, we would not be surprised that prescribers may choose to play it safe and go with Januvia, although pricing and formulary negotiations will also likely have huge impacts on market share gains and losses.
• Regarding the DPP-4 inhibitor class as a whole, four of the five companies have so far reported for 3Q15, with revenues of Lilly/BI’s Tradjenta (linagliptin), Takeda’s Nesina (alogliptin), Novartis’ Galvus (vildagliptin), and Januvia totaling $2.1 billion. This grew 8% YOY as reported from 3Q14’s total revenues of $1.9 billion and grew ~1% sequentially from 2Q15’s $2 billion. While we do not expect the class to foresee any significant declines due to primary care providers’ affinity toward its strong safety and tolerability, we believe that 3Q15’s relatively strong growth was mostly driven by Januvia’s easy comparison that will likely not last moving forward.

Table 1: Januvia franchise worldwide sales

2. Management announced that all 11 of Pfizer-partnered SGLT-2 inhibitor ertugliflozin’s phase 3 studies have completed enrollment, with data expected to roll out in 2016. Excitingly, this is the first update we have heard about the candidate for more than a year. While this isn’t huge news, it is certainly nice to hear that the candidate is moving along. In the aftermath of the positive EMPA-REG results for Lilly/BI’s Jardiance (empagliflozin), this may have been a strategic decision to direct attention to Merck’s work on SGLT-2 inhibitors- we certainly do think investors would want to hear about Merck’s plans for this class. We have been following eight of these phase 3 trials on ClinicalTrials.gov, of which one trial is expected to complete this December (ClinicalTrials.gov Identifier: NCT02226003), four in 2016, and two in 2017. In addition, the drug’s CVOT (ClinicalTrials.gov Identifier: NCT01986881) is expected to complete in 2020.

• During Q&A, management continued to express enthusiasm for a fixed dose combination of ertugliflozin and Januvia, stating that “the most important attribute” of the drug is the ability to formulate it with Januvia. Pfizer has agreed with this opportunity, as its management spoke very positively during the company’s 2Q15 update about the potential demand for this combination, particularly following the positive TECOS results. As a reminder, Lilly/BI’s Glyxambi became the first combination in this highly-anticipated class to reach the market when it was approved this past February. While we would agree that Januvia’s leadership within the DPP-4 inhibitor class seems solid, moving forward on the SGLT-2 inhibitor front will be smart for Merck in the context of the recent DPP-4 inhibitor slowdown and in terms of the likely class effect cardioprotection for SGLT-2s.

3. In addition, the company stated its commitment to regulatory filings of its Samsung-partnered insulin glargine candidate (MK-1293), although no further details were provided. We have not heard any updates on the Samsung-partnered insulin glargine candidate MK-1293 since a phase 3 trial in type 2 diabetes was completed in March. While we have not yet heard any news on this trial, it still represents an exciting milestone for one of the first three insulin glargine biosimilars (the other two being candidates from Lilly/BI and Biocon/Mylan) nearing the finish line. As background, last 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). Merck has not recently provided guidance on when we can expect to hear topline results, but we imagine the company may wait until it has topline data for the second phase 3 trial (type 1 diabetes) before submitting abstracts or making a topline announcement. As a reminder, Lilly/BI’s insulin glargine formulation Abasaglar launched in the EU this past September and Biocon/Mylan confirmed filing plans for its biosimilar insulin glargine.

• While we again did not hear any updates regarding Merck’s phase 1 trial on “smart” insulin candidate MK-2640, its estimated primary completion date moved back to January 2016 from July 2015 according to ClinicalTrials.gov (ClinicalTrials.gov Identifier: NCT02269735). In addition, the study now has an estimated enrollment of 74 participants, an increase from 58 participants from our 2Q15 update. At Friends For Life earlier this year, Dr. Aaron Kowalski (JDRF, New York, NY) clarified that this is a similar but somewhat distinct molecule from the candidate acquired from SmartCells in 2010 and expressed hope that Merck’s efforts will spark more interest in this area from the major insulin companies – this would certainly be understandable given the major disruption a successful smart insulin could cause in the market.

4. In light of the positive EMPA-REG results for Lilly/BI’s Jardiance, management expressed confidence in the DPP-4 inhibitor class and noted that Merck may consider redesigning ertugliflozin’s CVOT. When questioned about the role of DPP-4 inhibitors after such positive findings for SGLT-2 inhibitors during Q&A, management stressed that Januvia’s prescription volume has remained strong both before and after the EMPA-REG OUTCOME results. Management noted that “this market is very big” and “requires multiple medications for people over time,” maintaining confidence that Januvia will remain a “very strong add-on position” – see the yellow highlights below in the Q&A. We agree that there should certainly be room for both classes in such a large, complex market, but we do expect the general upward trend for SGLT-2 inhibitors and the downward trend for DPP-4 inhibitors to continue moving forward – though the DKA in SGLT-2 is probably providing some help to the DPP-4 inhibitor class (yes, it’s like ping pong!). In addition, the company commented (twice during Q&A!) that after EMPA-REG OUTCOME, Merck may consider slightly redesigning ertugliflozin’s CVOT to better answer whether the candidate can also demonstrate cardioprotection. We wonder whether companies will consider similar changes for trials of drugs in other classes, particularly GLP-1 agonists.

5. Management also highlighted that once-weekly DPP-4 inhibitor omarigliptin was approved in Japan and plans to file the drug in the US by the end of the year (as we learned in the 2Q15 update). As a reminder, omarigliptin was approved in Japan this past September under the trade name Marizev. During Q&A, management commented that this once-weekly formulation may help expand the DPP-4 inhibitor class into earlier lines of treatment – although we would agree, we already think it should be hitting earlier lines. Positive phase 3 results presented at last year’s EASD (and also at this year’s EASD) demonstrated a comparable safety and efficacy profile with omarigliptin vs. the once-daily Januvia. As we also pointed out in our EASD coverage, according to ClinicalTrials.gov, the expected end date for the drug’s cardiovascular outcomes trial (CVOT) has been pushed back to December 2020. This marks the third time the estimated completion date of the trial has been changed by several years; the original expected end date of 2019 was moved up to 2017 late last year. In addition to the CVOT, the phase 3 program for omarigliptin contains several trials projected to end in 2015 to early 2016. For more details on omarigliptin, please see our 3Q14 report and for a concise overview of Merck’s pipeline, please see the table below.

Table 2: Merck’s diabetes drug pipeline

Questions and Answers

Q: Can you just elaborate a little bit more on your view of Januvia and the broader oral diabetes landscape following the recent SGLT-2 outcomes data? Do you see incremental pressure in this franchise as that data is reflected on competitor labels?

A: If you look at Januvia, we continue to be pleased with the underlying demand in the US, where we're seeing about 4% TRx volume growth. And that's been consistent since before EMPA-REG and after EMPA-REG. You need to look at the most recent current week – it's just over 3% still. So we're seeing the underlying volume continue to be strong. If you look at what's occurring in the marketplace and you look at NBR data, which is the really early data that helps you understand the dynamics early in the marketplace, we see switching that's occurring within the SGLT-2 class, but we do not see switching occurring across classes at this point in time.

We believe that this market is very big. It requires multiple medications for people over time, and we believe that Januvia will maintain a very strong add-on position as we go into the future. So we remain optimistic about the promise of Januvia in the marketplace. We're not giving 2016 guidance today. As I look at managed care, those decisions have been made for 2016 and I'll say that our formulary position in 2016 remains strong and very similar to what it was in 2015.

Q: Could you just update the timelines of your SGLT-2 inhibitor and when you'll have outcomes data?

A: With respect to the timing of SGLT-2 results for ertugliflozin, as indicated, all 11 of our studies are fully enrolled and data will begin to roll out from those studies in 2016. We do have a cardiovascular outcomes study. Those studies obviously take a longer period of time. The expectation for those studies is that data will be available around the 2019 timeframe. But of course, in light of the results that were obtained by Lilly/BI in the EMPA-REG study – as we look at those results, there's interest in asking the more explicit question of whether ertugliflozin has the same kinds of effects on cardiovascular mortality. This could result in a slight change in the way we conduct our outcomes study. And we'll have more commentary on that later. We're reviewing those issues but that's basically where we stand at this point.

Q: You mentioned that the diabetes franchise was a little weak in Japan. Can you talk about what's going on there and is that because you have this new once-weekly approved? Was that having any impact and how do you think that plays out over there?

A: Japan remains a very important market. In fact, if you look at DPP-4 inhibitors, it's one of the few markets in the world where DPP-4 inhibitors actually have more patient days on this therapy than metformin or sulfonylureas do. So it's always been a fast uptake market for DPP-4 use. And for Januvia, we have a very high share. So the issue there is it's harder to grow because you can't take share away from sulfonylureas as much because you already have the leading product in the marketplace.

We are launching our once-weekly DPP-4 inhibitor and we think that could be a very important product. It's under a two-week prescription limit right now but that will be removed over time. And we think that that will help us potentially expand the DPP-4 class even into earlier lines of treatment. Overall, it was down about 2% vs. the prior year in Japan, so it wasn't a significant decrease. And part of that is also customer timing.

Q: One thing that appeared to be really robust in the quarter were obviously Januvia and Janumet sales relative to how we projected them. I’m assuming it just has to do with realized sales and your contracting strategy in the US. Have you recently implemented anything on that in the way you're accounting for discounts in rebates? And are you an able to realize a higher level of net sales as a result of anything that you're doing on the accounting on Januvia and Janumet?

A: I'll make sure I'm really clear about Januvia. What I look at first is TRx volume growth. And in the United States, we saw 4% TRx volume growth. But we also saw timing of customer buying patterns that caused about $100 million of increased sales in this quarter, and those will come out in the fourth quarter or subsequent quarters. We increased the price last year in the third quarter. And we saw customers draw down their inventories. This year in the third quarter, we did not increase price. So we saw inventory levels remain at higher levels. And Januvia is just a very big product. And a few days of inventory in one direction or another can impact reported sales significantly.

So that's why you saw that difference of $100 million from vs. the prior year. And then by the way, there's no change in terms of accounting or the rebates or discounts. Those are all consistent. What you're seeing is this timing of when we took price last year vs. this year. That's all. That's why I say to monitor the volume, and we're very pleased with the volume. We feel good about the volume going into fourth quarter and the volume going into 2016.

Q: On ertugliflozin, can you maybe just outline what you view, aside from developing combo pills, as the key points of differentiation relative to the other competitors? And any thoughts on how you're designing your outcomes study that would be required for that product?

A: What I've said from the very beginning is that when we partnered with Pfizer on the drug, this is a drug that has extremely good pharmaceutical properties, and hence, it can be paired easily. It plays nicely with others. And so the most important attribute of the drug is our ability to formulate it together with Januvia and develop it in that context.

With respect to the outcomes studies, the data that are available from EMPA-REG obviously influence the way we think about those outcomes studies. And so we're looking at that carefully to ask the question of what do we need to do to ensure the outcomes study provides a satisfactory test of whether ertugliflozin also reduces cardiovascular mortality in the way that was seen in EMPA-REG.

-- by Melissa An, Emily Regier, and Kelly Close