Memorandum

Merck 3Q17 – DPP-4 inhibitor Januvia franchise falls 2% YOY in sales but grows in volume; Management says diabetes business is “stable”; No discussion of generic DPP-4s or diabetes pipeline – October 27, 2017

Executive Highlights

  • Januvia franchise sales (DPP-4 inhibitor sitagliptin) declined 2% YOY in 3Q17, totaling $1.5 billion. Revenue from standalone Januvia rose 1% YOY to $1 billion, while revenue from fixed-dose combination Janumet (sitagliptin/metformin) fell 6% YOY to $513 million. Januvia accounted for 66% of total franchise sales vs. Janumet’s 34%, which is on par with recent quarters.
  • Management characterized the diabetes business as stable overall, pointing to volume growth in 3Q17 that will likely continue into 2018 – the revenue decline is thus due mainly to pricing pressure.
  • There was no discussion of Merck’s diabetes pipeline, but we imagine Pfizer-partnered SGLT-2 inhibitor ertugliflozin is on track for an FDA decision by end of 2017 – we don’t believe there will be an Ad Comm. The companies have also filed New Drug Applications (NDA) for fixed-dose combinations of ertugliflozin with metformin and with sitagliptin, and those decisions are also expected by year-end.

Merck provided its 3Q17 update today, in a call led by CEO Mr. Ken Frazier. This report covers key financials on the company’s Januvia franchise (DPP-4 inhibitor sitagliptin), and also includes an update on the diabetes pipeline, although there was minimal discussion of these candidates on the call. Most notably, management pointed to Januvia as a “pillar” for Merck’s business overall, suggesting that this franchise is stable despite fluctuating sales of-late (which is not unique to Januvia, but rather, reflects revenue patters for the entire DPP-4 class).

See below for our top four highlights – three on the financial side, one summarizing the company’s diabetes pipeline. Click here for Merck’s 3Q17 press release and here for supplementary financial data.

Financial Highlights

1. Januvia franchise sales fell 2% YOY to $1.5 billion in 3Q17, against a relatively easy comparison of 1% YOY decline in 3Q16. Management cited pricing pressure as an ongoing challenge, highlighted worldwide volume growth for Januvia (sitagliptin) and fixed-dose combination Janumet (sitagliptin/metformin), and emphasized that this diabetes business is stable, a “pillar” for Merck’s other portfolios. Indeed, combined Januvia/Janumet sales surpassed $6 billion in 2014, 2015 and 2016 – this DPP-4 inhibitor franchise remains on track to do so in 2017 as well.

2. Standalone Januvia posted $1 billion in global revenue, which marks a modest 1% YOY increase and a 7% sequential increase. Januvia sales have hovered around $1 billion per quarter since 2012, which speaks to what management highlighted as stability for this business.

3. Sales of fixed-dose combination Janumet decreased 6% YOY to $513 million globally (from $548 million in 3Q16). Janumet accounted for 34% of total franchise revenue in 3Q17 vs. 66% for Januvia, which is on par with recent quarters.

Pipeline Highlights

4. There was no mention of Merck’s diabetes pipeline during prepared remarks or Q&A, but we expect that an FDA decision is still expected by year-end for Pfizer-partnered SGLT-2 inhibitor ertugliflozin, FDC ertugliflozin/metformin, and FDC ertugliflozin/sitagliptin – we don’t believe there will be an Ad Comm. The company’s biosimilar insulin glargine received tentative FDA approval in July, under brand name Lusduna Nexvue (previously known as MK-1293), which means the product can be launched in US pharmacies following resolution of the patent infringement lawsuit from Sanofi (over Lantus).

Financial Highlights

1. Revenue Down 2% YOY for DPP-4 Inhibitor Januvia Franchise, Despite Worldwide Volume Growth; Management Underscores: Diabetes Business is a “Pillar”

Januvia franchise sales fell 2% YOY to $1.5 billion in 3Q17, against a relatively easy comparison of 1% YOY decline in 3Q16 (“expected,” according to management, due to a large US buy-in in 3Q15). This franchise represents Merck’s current diabetes business, and encompasses standalone DPP-4 inhibitor Januvia (sitagliptin) as well as fixed-dose combination Janumet (sitagliptin/metformin). By geography, $795 million of quarterly revenue came from the US market (down 2% YOY), and $730 million came from ex-US markets (also down 2% YOY). Global franchise sales grew 1% sequentially, also ~$1.5 billion in 2Q17. On today’s call, Merck emphasized that its diabetes business is stable, a “pillar” for the rest of the company’s portfolios. Global prescription volume (TRx) of Januvia and Janumet was up in 3Q17, despite the drop in sales, and management reviewed “macro trends” pointing to continued volume growth in future quarters, particularly outside the US. We didn’t hear specifically how much Januvia TRx changed, but the contrast between rising volume and falling sales indicates pricing pressure on these diabetes products. With higher rebates to payers/PBMs, greater patient discounts, and more prescriptions in the Medicaid channel (segment mix), it follows that Merck’s realized price for Januvia and Janumet would decrease. Pricing pressure – and especially US pricing pressure – was cited as the main commercial challenge for Merck Diabetes in 1Q17 (sales down 6% YOY, down 9% YOY in the US) and 2Q17 (sales down 8% YOY, down 11% YOY in the US). Management suggested that pricing pressure will continue going forward, but again, presented an optimistic outlook regarding future volume growth. Presumably, this means more people with diabetes around the world are gaining access to a safe, effective DPP-4 inhibitor therapy. Moreover, though Januvia franchise sales have fluctuated somewhat over the past couple years (experiencing low or negative growth, mirroring trends for the entire class), we note that this is still a massive business for Merck, upwards of $6 billion in 2014, 2015, 2016, and in all likelihood, 2017. Januvia also continues to lead the DPP-4 inhibitor class by value (by far the frontrunner), capturing 61% of pooled sales in 2Q17.

  • Notably, management made no comment on the impending Januvia patent expiration, even when pressed during Q&A. The first of Merck’s patents on sitagliptin expired in April 2017, and in July, India-based pharmaceutical company Zydus Cadila announced tentative FDA approval of a generic sitagliptin/metformin combination. Full patent expiry for Janumet isn’t slated until 2022, but this regulatory decision means the FDA is open to releasing a generic version sooner than that. As we understand it, Zydus Cadila’s generic product could be launched in the US pending resolution of any patent infringement lawsuits, but Merck has been silent on this. The prospect of lower-cost DPP-4 inhibitors on the market in the 2022 era is certainly exciting – we think it’s very important for companies to realize the true value of massive R&D investments for the full patent life of products (we think the patent lives should be longer in fact given new and costly long-term trials that are required). Notably, although  this class has faced increasing competition of-late from GLP-1 agonists and SGLT-2 inhibitors for several reasons, not the least of which is neutral CV effects vs. cardioprotection from some of the more advanced agents – we believe it has a major place in therapy today, especially among newly diagnosed patients and in combination. Brigham and Women’s Dr. Deepak Bhatt suggested that generic DPP-4s could replace generic sulfonylureas in clinical practice, which will be great to see further out. Currently SFUs have cost considerations as their only viable defense (in light of weight gain, hypoglycemia risk, beta cell burnout, and possible CV harm).

Figure 1: Total Januvia Franchise Sales (1Q07-3Q17)

2. Standalone Januvia ~Flat at $1 Billion Quarterly Sales

Standalone Januvia posted $1 billion in global revenue, which marks a modest 1% YOY increase and a 7% sequential increase. Sales grew 5% YOY to $598 million in the US, but fell 6% YOY to $414 million ex-US. This product showed a stronger financial performance overall compared to fixed-dose combo Janumet (see below), which we found interesting because Janumet has fared better for the past several quarters (4Q16, 1Q17, and 2Q17). Januvia accounted for 66% of total franchise sales, on par with previous quarters (Janumet captured the remaining 34%). Worldwide Januvia sales have hovered around $1 billion per quarter since 2012, which speaks to what management highlighted as stability for this business.

Figure 2: Standalone Januvia Sales (1Q07-3Q17)

3. FDC Janumet Sales Drop 6% YOY ($513 Million), 18% YOY in the US ($197 Million)

Sales of fixed-dose combination Janumet decreased 6% YOY to $513 million globally (from $548 million in 3Q16). This represents 9% sequential decline against a relatively tough comparison, given the 14% sequential increase in 2Q17 to $563 million. By geography, the combination product brought in $197 million in US revenue (down a marked 18% YOY, from a base of $241 million in 3Q16) and $316 million in ex-US revenue (up 3% YOY from a base of $307 million). This continues a pattern of stronger international sales of Janumet compared to US sales, but counter to a trend we’ve noticed since 4Q16, Janumet sales appeared to be more sluggish overall compared to Januvia sales in 3Q17 (worldwide revenue from the standalone DPP-4 therapy grew 1% YOY, see above). Janumet accounted for 34% of total franchise revenue in 3Q17 vs. 66% for Januvia, which is on par with recent quarters.

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

Pipeline Highlights

4. No Mention of Diabetes Pipeline; Upcoming Opportunities in SGLT-2 Ertugliflozin + Biosimilar Insulin Lusduna Nexvue

There was no mention of Merck’s diabetes pipeline during prepared remarks or Q&A, but we expect that an FDA decision is still expected by year-end for Pfizer-partnered SGLT-2 inhibitor ertugliflozin, FDC ertugliflozin/metformin, and FDC ertugliflozin/sitagliptin. We don’t believe there will be an Ad Comm. During Merck’s 2Q17 update, management discussed how the ertugliflozin franchise could broaden its diabetes portfolio, making the company an even bigger player in diabetes care (we’ve heard that Januvia is the highest-prescribed branded diabetes drug as things stand). We’ve noticed particular enthusiasm for the fixed-dose combination of ertugliflozin with sitagliptin, which was highlighted during two oral presentations at ADA 2017 (one-year data from VERTIS FACTORIAL, VERTIS SITA2) and during Dr. William Cefalu’s keynote address at Keystone 2017. Merck management has previously positioned it as a distinct advantage that they are combining an advanced SGLT-2 agent (showing profound glycemic and weight loss efficacy) with what is by far the market leader in the DPP-4 inhibitor class (sitagliptin). In our view, combination therapy could be a major growth driver for DPP-4 inhibitor businesses moving forward. SGLT-2/DPP-4 fixed-dose tablets come with convenient oral dosing, lower pill burden, one co-pay instead of two, and a superior efficacy/side-effect profile vs. component monotherapies. We can’t emphasize enough the importance of weight loss for people with type 2 diabetes, for better health outcomes and better treatment satisfaction. Since DPP-4 inhibitors are largely weight neutral on their own, combining these agents with an SGLT-2 inhibitor makes therapeutic sense. Daiichi Sankyo/Mitsubishi Tanabe Pharma recently launched an SGLT-2/DPP-4 combo (canagliflozin/teneligliptin) in Japan under brand name Canalia, and AZ’s Qtern (dapagliflozin/saxagliptin) was FDA-approved in March 2017. This class also includes Lilly/BI’s Glyxambi (empagliflozin/linagliptin), though this product hasn’t really gained commercial traction since FDA approval in February 2015. As we see it, Merck is very well-positioned to make its Pfizer-partnered SGLT-2/DPP-4 combo a commercial success, because the company could allocate more resources within its diabetes portfolio to this potent therapy (in contrast, Lilly’s diabetes portfolio contains many more products, and we imagine commercial resources are being prioritized elsewhere besides Glyxambi). We’re keeping our fingers crossed for a four-product SGLT-2 inhibitor market (Lilly/BI’s Jardiance, AZ’s Farxiga, J&J’s Invokana, and Merck/Pfizer’s ertugliflozin) in the US come 2018!

  • Merck’s biosimilar insulin glargine received tentative FDA approval in July, under brand name Lusduna Nexvue, which means the product can be launched in US pharmacies following resolution of the patent infringement lawsuit from Sanofi (over Lantus). We’re not entirely surprised that Lusduna Nexvue hasn’t made it into prepared remarks during the company’s 2Q17 or 3Q17 calls, as it may be many months until this product is launched. The Sanofi lawsuit could be settled in one of three ways: (i) The two companies reach an agreement (as was the case for Lilly/BI when Sanofi issued a similar lawsuit regarding Basaglar), (ii) a court decides in favor of Merck, or (iii) 30 months elapse since the lawsuit was filed in September 2016 (~March 2019 launch). Notably, Sanofi just filed a lawsuit against Mylan for its Biocon-partnered biosimilar insulin glargine candidate as well. That said, there’s no doubt that the biosimilar insulin class will be expanding in years ahead, and we’re pleased to see Merck’s official entry into type 1 diabetes treatment with this basal candidate (especially since the company discontinued its phase 1 glucose-responsive insulin in 2Q17).

Merck Diabetes Pipeline Summary

Product

Product Details

Status

Timeline

Lusduna Nexvue (MK-1293)

Biosimilar insulin glargine (Sanofi’s Lantus)

Received tentative FDA approval

Tentative FDA approval granted July 2017; Full approval contingent on resolution of Sanofi’s patent infringement lawsuit, filed September 2016; Phase 3 data reported at ADA 2016

MK-8835

SGLT-2 inhibitor ertugliflozin

Under review

FDA/EMA decisions expected by end of 2017; Other regulatory filings planned for 2017; Phase 3 data reported at EASD 2016

MK-8835A

Ertugliflozin/sitagliptin (Merck’s Januvia)

Under review

FDA/EMA decisions expected by end of 2017; Other regulatory filings planned for 2017; Phase 3 data reported at EASD 2016

MK-8835B

Ertugliflozin/metformin

Under review

FDA/EMA decisions expected by end of 2017; Other regulatory filings planned for 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 completed April 2017

MK-2640

Glucose-responsive insulin

Discontinued from phase 1

Discontinued based on insufficient efficacy in phase 1 trial, completed August 2016 following several delays

 

-- by Payal Marathe and Kelly Close