Memorandum

Merck 2Q14 - Januvia up 2% to $1.6 billion, driven by Europe, Canada, and Emerging Markets - July 29, 2014

Executive Highlights

  • The Januvia franchise grew 2% YOY to $1.6 billion in 2Q14, driven by Europe and emerging markets while Japan and the US saw slight declines.
  • While US revenue declined, total prescription volume in the US rose significantly.
  • No updates were provided on Merck’s pipeline, including ertugliflozin, insulin glargine, once-weekly DPP-4 inhibitor omarigliptin (MK-3102), and smart insulin.

This morning, Merck CEO Mr. Ken Frazier led the company’s 2Q14 financial results call. Below are our top five highlights from the presentation, followed by selected Q&A.

1. Globally, the Januvia franchise grew 2% year-over-year (YOY) to $1.6 billion, driven largely by Europe and emerging markets, while Japan and the US experienced modest declines.

2. Despite this revenue decline in the US, domestic total prescription volume (TRx) for Januvia grew significantly. This suggests pricing continues to move one direction only – down. Management also voiced confidence about formulary access for Januvia in 2015.

3. With all eyes on TECOS (the CVOT for Januvia) due to mixed data on the risk of heart failure with other agents in the class and strong continued interest in potential cardioprotection, Merck has confirmed that the study’s last patient visits will occur in December 2014, with results announced in 2015.

4. No updates were provided on either of Merck’s two exciting insulin projects: i) Merck/Samsung Bioepis’ phase 3 insulin glargine candidate (MK-1293) or ii) its “smart” glucose-responsive insulin (L-490).

5. Development continues on Merck/Pfizer’s phase 3 SGLT-2 inhibitor ertugliflozin (MK-8835) and Merck’s phase 3 once-weekly DPP-4 inhibitor omarigliptin (MK-3102).

Top Five Highlights

1. Global sales of the DPP-4 inhibitor Januvia (sitagliptin) grew 2% year-over-year (YOY) to $1.6 billion in 2Q14. The 2Q14 results were fairly consistent with recent quarters (3% YOY growth as reported in 1Q14, 2% in 4Q13, and -1% in 3Q13), and had a somewhat challenging comparison, as 2Q13 was the 2013 quarter with the greatest YOY growth (5%). Sequentially, Januvia franchise sales grew 18% against a very easy comparison (sales fell 18% sequentially in 1Q14). However, it is important to note that this may not be an accurate comparison due to Merck’s payment scheme with Japanese distributor Ono Pharmaceuticals (in which Merck is paid only in 2Q and 4Q). Revenue growth in 2Q14 was mostly driven by 4% growth in international markets (which represent slightly more than half of total sales); Europe, Canada, and emerging markets were particularly strong performers. On the other hand, both the US and Japan saw slight declines in sales.

  • For context, in 2Q14, Novartis’ Galvus grew 13% as reported to $328 million. We’ll learn more about other DPP-4 competitors when AZ, Takeda, and Lilly,report on July 31, August 1, and January 29, respectively.
  • The Januvia franchise’s weakness in 2013 and 2014 fell short of the regular double-digit growth seen in 2012 and previously, reflecting several factors. Of course, one obvious explanation is the product’s ever-rising base and the fact that Merck is further down the road in saturating the potential DPP-4 inhibitor market. During the 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]). Another factor is the broader slowdown in the DPP-4 inhibitor class witnessed in recent quarters – this slowdown began abruptly in the first quarter of 2013 and has never reversed. This slowdown, which has been particularly acute in the US, reflects a number of 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.
  • Continuing a trend from previous quarters, Merck’s sitagliptin/metformin fixed-dose combination Janumet performed relatively well while standalone Januvia experienced a slight decline in sales. We find this unsurprising since Janumet is priced the same as Januvia, and because, although it requires a bit of complexity in terms of titration, Janumet’s results in most patients are far better than with Januvia as monotherapy. Specifically, Janumet experienced 10% YOY growth in 2Q14, while Januvia’s revenue fell by 1%. This follows similar (or even more striking) results in 1Q14, when Janumet grew by 16% and Januvia fell by 3%. Such a disparity between the two drugs’ growth trends highlight fixed-dose combinations as an increasingly attractive alternative (due to convenience and the consolidation of copays for patients). Thus, FDCs could perhaps be the most effective approach to revive the growth of the DPP-4 inhibitor field – we are particularly interested in fixed dose combinations with branded agents that have a unique mechanism of action, such as SGLT-2 combinations (indeed, Merck and Pfizer have indicated interest in such an agent).
  • As a reminder, Merck has a unique payment scheme with its distributor in Japan, Ono Pharmaceuticals, where Ono only pays Merck in 2Q and 4Q. Therefore, the revenue and sequential growth in even numbered quarters can appear artificially high. The revenue Merck received from Ono Pharmaceuticals for Januvia sales in 2Q14 in Japan was approximately $60 to $70 million. If we were to evenly spread this out between 1Q14 and 2Q14, then the 2Q14 revenue would have been closer to $1.5 billion (as opposed to $1.6 billion). Evening out the revenue for last year due to this payment scheme will result in 2Q13 having a revenue of also $1.5 billion, leading to a YOY of approximately 0%, showing minimal change. Sequentially with these numbers from Ono, sales grew 18.6% between 1Q14 and 2Q14.  

Table 1: Januvia franchise worldwide results

  2012 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14
Revenue (USD millions) $5,745 $1,293 $1,546 $1,369 $1,624 $5,833 $1,334 $1,577
YOY Growth 22.6% -1.4% 5.3% -0.8% 2.4% 1.5% 3.2% 2.0%
Sequential Growth -18.5% 19.6% -11.4% 18.6% - -17.9% 18.2%

2. Although Januvia sales declined by 1% in the US, management highlighted that the total prescription volume (TRx) grew in the US in the same time period. Merck noted that TRx growth was 3% in the latest rolling four-week average, commenting that, “TRx trends right now are more positive than they’ve been.” Indeed, the past two weeks have shown 4% growth compared to the same weeks in the prior year. Furthermore, in Merck’s 1Q14 call, it indicated that TRx was better in April, than it was in March; and that March was better than the prior three months. At that time, Merck felt that the TRx volume “certainly” had stabilized, and it was starting to turn its attention to growing this measure again – the company appears to be making progress on this goal. Merck expects to see continued growth in TRx through the rest of the year, and expressed hope that such increases signify the resumed expansion of the Januvia franchise. Overall, management still characterizes diabetes as an “area of growth” – this was a bit surprising; although it seems clear that Merck intends to remain in this disease area, the franchise has not shown growth over 5% since late 2012. 

  • We assume the 1% reduction in US sales were due to price reductions though inventory complexities may also play a role. Indeed, we have observed pricing pressure coming up more and more often stateside, particularly when fewer differences exist between compounds in the same class. For example, we recently learned that GSK is strategically launching its once-weekly GLP-1 agonist Tanzeum (albiglutide) in the US at a significantly lower cost (third-party sources have suggested that the wholesaler acquisition cost is ~10% lower than that of Victoza 1.2 mg), which has so far generated considerable interest from payers, as discussed in our GSK 2Q14 report.
  • During Q&A, Merck suggested that formulary positioning for 2015 is “moving forward in a good way,although it is too early to make concrete conclusions. Merck raised its very favorable access capabilities across managed care for the products the company has in the United States – that was very positive to hear. Regarding formulary changes in 2015, Merck said it continues to work closely with its managed care customers and expects to have good formulary access for Januvia along with other products. Although no exact numbers were provided, the company’s sentiments toward formulary access seemed quite positive, given that they don’t typically report on formulary access in this sort of detail.
  • Merck has seen revenue growth outside of the US corresponding to substantial volume growth in Europe, Canada, and emerging markets, according to management. While revenue in these foreign markets grew by 4%, Merck commented that this increase was partially offset by the April 1 price reductions that occurred in Japan. Japanese pricing has traditionally been much higher than average pricing globally – it will be interesting to see what happens with the profit margins associated with sales in Japan, which have traditionally been quite strong, as we understand it.

3. During Q&A, Merck mentioned that TECOS, the CVOT for Januvia, will likely see last patient visits this December – this is consistent with the study’s expected primary completion date of December 2014 on ClinicalTrials.gov. Merck commented that results will be available sometime next year – this is obviously a foregone conclusion and we did not get any further granularity than this, unfortunately. As reported in 1Q14, the Data Safety and Monitoring Board for the CVOT of TECOS looked at the rate of congestive heart failure hospitalization and reported no reason to modify or discontinue the study. Given the statistically significant 27% increase in heart failure seen in SAVOR (the CVOT for AZ’s Onglyza), a lot of eyes are on the TECOS data. This is especially true thanks to TECOS’ longer duration (five years) than prior DPP-4 inhibitor CVOTs, which KOLs including Dr. John Buse (University of North Carolina, Chapel Hill, NC) have expressed hope will give time for more nuanced results to be seen.

  • Adding to the small body of evidence suggesting a potential heart failure hypothesis, a recent retrospective case-control study, published in the journal JACC Heart Failure, found increased risk of heart failure hospitalization with sitagliptin, despite no increase in all-cause hospitalization and death. The study drew data from a US insurance claims database, in which 7,620 patients met the inclusion criteria of a type 2 diabetes and incident heart failure, of whom 887 were exposed to sitagliptin. Interestingly, a separate analysis of this data showed that sitagliptin use was not associated with an increased risk of hospitalization for heart failure following admission to the hospital for acute coronary syndrome. The minimal amount and mixed nature of this evidence places even more attention on the TECOS study.

4. Disappointingly, Merck did not mention any updates on the progress of Merck/Samsung Bioepis’ phase 3 insulin glargine candidate (MK-1293) or its early-stage glucose-responsive insulin (L-490). 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). According to ClinicalTrials.gov, the candidate has two phase 3 trials currently recruiting, with estimated primary completion dates in January and February 2015. Turning to Merck’s glucose-responsive insulin candidate, in December 2010, Merck acquired SmartCells, a very exciting private company developing a glucose-dependent insulin. SmartCells had received initial investments by JDRF (the nonprofit has been extremely focused in identifying early-stage opportunities and helping push them forward). 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. Merck certainly has learned a great deal about glucose-responsive insulin, which is obviously quite a complex R&D challenge. Indeed, a glucose-responsive insulin is one of the holy grails of diabetes pharmacotherapy, as a fully effective smart insulin would likely eliminate the risk of hypoglycemia.

5. There were no updates on Merck’s other diabetes pipeline candidates, including it/Pfizer’s phase 3 SGLT-2 inhibitor ertugliflozin (MK-8835) and the phase 3 once weekly DPP-4 inhibitor omarigliptin (MK-3102).

  • According to ClinicalTrials.gov, ertugliflozin currently has seven ongoing trials that are currently recruiting (see the table below).

Table 2: Phase 3 studies for ertugliflozin, arranged by estimated primary completion date

Study Name (Identifier)

Estimated Enrollment

Study Treatment

Primary Endpoint

Est. Primary Completion (as of May 9)

MK-8835-003 (NCT01958671)

450 patients with type 2 diabetes

Ertugliflozin monotherapy vs. placebo or metformin

A1c change from baseline to week 26

August 2015

 

MK8835-005

(NCT02099110)

1,250 patients with type 2 diabetes

Ertugliflozin vs. sitagliptin when added to metformin

A1c change from baseline to week 26

October 2015

MK-8835-006 (NCT02036515)

405 patients with type 2 diabetes

Ertugliflozin vs. placebo as add-on to metformin and sitagliptin

A1c change from baseline to week 26

October 2015

MK-8835-007 (NCT02033889)

600 patients with type 2 diabetes

Ertugliflozin vs. placebo as add-on to metformin

A1c change from baseline to week 26

December 2015

MK-8835-002 (NCT01999218)

1230 patients with type 2 diabetes

Ertugliflozin vs. glimepiride as add- on to metformin

A1c change from baseline to week 52

December 2015

MK-8835-001 (NCT01986855)

468 patients with type 2 diabetes and stage 3 chronic kidney disease

Ertugliflozin vs. placebo (with possible background therapy)

A1c change from baseline to week 26

January 2016

MK-8835-004 (NCT01986881) [CVOT]

3,900 patients with type 2 diabetes and established CV disease

Ertugliflozin vs. placebo (with possible background therapy)

Time to first MACE event

June 2020

  • Regarding Merck’s once-weekly DPP-4 inhibitor candidate, omarigliptin, Merck’s chief competitor originally appeared to be Takeda’s once-weekly DPP-4 inhibitor trelagliptin. However, while Takeda submitted trelagliptin in Japan this past March, the company decided to not pursue a regulatory filing in the US and EU due to the high cost of development, especially that of CVOTs required in the US. This provides yet another example of how CVOTs can stifle much needed innovation in drug development. We are curious to see whether changing DPP-4 inhibitors from once-daily to once-weekly will have a significant impact on patient adherence and what specific patient populations this will affect. That said, Merck indicated during its investor briefing in May that omarigliptin will first be submitted in Japan (by the end of this year), so Merck will still be competing with Takeda in some markets and potentially soon.
    • 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 Diabetes Drug Pipeline

Drug Name Class Indication Status/Timeline Other Remarks
Omarigliptin (MK-3102) DPP-4 inhibitor Type 2 diabetes Phase 3 Once-weekly formulation; Japan submission by FY14
Ertugliflozin (MK-8835) SGLT-2 inhibitor Type 2 diabetes Phase 3 Partnered with Pfizer
MK-1293 Biosimilar insulin glargine Type 1 and type 2 diabetes Phase 3 Partnered with Samsung Bioepis
L-490 Glucose-responsive insulin Type 1 and type 2 diabetes Preclinical To enter phase 1 development (undisclosed timeline)

Q: For 2015, the formulary changes should be announced pretty soon. I was curious if you can maybe preview that a little bit. Are there any major changes for Januvia that we should be expecting for 2015? Have you been as aggressive this year as last year to make sure you're maintaining that on formulary and not getting kicked off any exclusionary formularies?

Questions and Answers

Q: My question is on the DPP-4 side. You mentioned you expect global growth in 2014 for the Januvia franchise, which compared to where we were a few months or year or so ago would not really be news. In terms of how you would forecast that going forward, is that something again where we might see just flat or low-ish single-digit growth like we saw this quarter, or do you see any of the investments you and some of your competitors are making in DPP-4 inhibitors regenerating the growth of that franchise to make more of an impact as we go forward?

A: As I said before, our second quarter sales were $1.6 billion, which represented 2% growth. And that was from 4%growth outside the U.S. and minus 1% growth in the U.S. So let me focus on the U.S. first. We've always said that what's most important is to watch TRx volume. There are going to be wholesaler buyer pattern changes that occur over the year. If you look at the second quarter this year, we had a tough comparison to the second quarter last year when, as you may recall, we grew 9% over the prior year. That's why we focus on the underlying volume. The good news is that the TRx trends right now are more positive than they've been, and we have 3% growth over the rolling four weeks. And if you look at the past two weeks, we actually had 4% growth versus the same week prior year. So we expect the growth in TRx to continue as we go through the second half of the year, and that’s why we’re cautiously optimistic on the volume increases that we're seeing in the United States.

In the international markets, we had good volume growth in Europe, Canada, emerging markets, and we maintain our strong market leadership position. Those were partially offset a bit by the April 1 price reductions that occurred in Japan. When you look at the strength of our franchise, we have maintained about a 65% share globally and about a 75% share of the class in the U.S. So it really is about getting patients to be considered for DPP-4s prior to sulfonylureas. And that's where we think we're beginning to see some progress in the U.S. and remain cautiously optimistic as we expect growth for the second half of the year.

A: Those negotiations are still in progress as we speak. We have had very good access capabilities across managed care for the portfolio of products that we have in the United States. And we continue to work very closely with our managed care customers, and we expect that in 2015 we will have good formulary access for Januvia and other products as well. It's too early to have exact numbers on access, but overall we feel that things are moving forward in a good way.

 

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