Merck 4Q15 – Januvia (sitagliptin) franchise revenues declined 12% YOY operationally to $1.4 billion in 4Q15; 2015 revenues flat vs. 2014 at $6 billion; SGLT-2 inhibitor ertugliflozin to complete phase 3 in 2016 – February 22, 2016

We’re back with our expanded coverage of Merck’s 4Q15 call, which was held in a call led by CEO Mr. Ken Frazier. Below are our top five highlights from the call, with new additions from our quick take coverage highlighted in blue, followed by Q&A.

1. The Januvia (sitagliptin) franchise declined 12% year-over-year (YOY) operationally in 4Q15 to $1.4 billion; year-end revenues for the franchise totaled $6 billion, staying mostly flat from 2014 revenues.

2. Management confirmed that Merck expects to complete the phase 3 program for Pfizer-partnered SGLT-2 inhibitor ertugliflozin, with anticipated filings for the candidate both as a single agent and in combination with Januvia.

3. The call provided no additional updates on Samsung-partnered insulin glargine candidate (MK-1293) or once-weekly DPP-4 inhibitor omarigliptin; however, according to ClinicalTrials.gov, the estimated primary completion date of Merck’s phase 1 trial on “smart” insulin candidate MK-2640 has moved back to March 2016.

4. During Q&A, management continued to express confidence in the DPP-4 inhibitor class in the context of the positive EMPA-REG OUTCOME results for Lilly/BI’s Jardiance (empagliflozin).

5. The overall DPP-4 inhibitor class fell 9% YOY to $2.1 billion in 4Q15 and fell 2% YOY to $8.7 billion for 2015 full year sales.

Top Five Highlights

1. The Januvia (sitagliptin) franchise declined 12% year-over-year (YOY) operationally in 4Q15 to $1.4 billion; year-end revenues for the franchise totaled $6 billion, staying mostly flat from 2014 revenues. Specifically in 4Q15, standalone Januvia sales declined 15% operationally YOY to $921 million and Janumet (sitagliptin/metformin) sales declined 8% operationally YOY to $526 million. Franchise sales declined 8% operationally from 3Q15; revenues of standalone Januvia and Janumet declined 9% and 6%, respectively. Regarding year-end revenues, of the total $6 billion, Merck reported $3.9 billion in Januvia revenues and $2.1 billion in Janumet revenues – total franchise revenues thus stayed mostly flat (a slight increase of 0.2% YOY operationally) with Januvia declining 2% YOY and Janumet growing 4% YOY, all operationally. These trends match what we’ve seen in the recent past, with metformin combinations driving more of the growth in the class – combo medicine is here to stay, especially when it’s priced at parity. Overall, management noted the franchise’s lower sales for 4Q15 is mostly driven by an expected decline due to customer purchase timing – specifically, the call mentioned the impact of a significant reduction in channel inventory following a buy-in during 3Q15 (see Q&A below for more details on this).

• However, management highlighted that Januvia remains a key area of focus for the company. Throughout the call, management repeatedly referenced that the company will continue to prioritize resources toward Januvia and that Merck expects that the franchise will grow in 2016. This is similar to what we heard at this past JP Morgan, which was good because if nothing else, it cements Merck’s commitment to people with diabetes.

2. Management confirmed that Merck expects to complete the phase 3 program for Pfizer-partnered SGLT-2 inhibitor ertugliflozin, with anticipated filings for the candidate both as a single agent and in combination with Januvia. This is confirmed from what we heard from Pfizer’s 4Q15 call. With Merck’s strong leadership in diabetes, we agree that it will be smart for the company to invest in SGLT-2 inhibitors and to bring to market a DPP-4/SGLT-2 combination, though we need to see more research on that fixed dose combo vs. just an SGLT-2. As we correctly predicted back in 2013, when management wasn’t giving any dates, regulatory submission has now been targeted for 2016. Our sense is this has been on target for a while and there is undoubtedly even more enthusiasm following EMPA-REG.

3. The call provided no additional updates on Samsung-partnered insulin glargine candidate (MK-1293) or once-weekly DPP-4 inhibitor omarigliptin. Similar to the 3Q15 update, we have not heard any updates on MK-1293 since a phase 3 trial in type 2 diabetes was completed in March 2015. 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. Regarding omarigliptin, the drug was approved in Japan (under the trade name Marizev) in 3Q15 and as of Merck’s 2Q15 update, the company continues to plan to file the drug in the US by the end of the year. According to ClinicalTrials.gov, the end date of omarigliptin’s CVOT remains at December 2020. For more on the drug, please see our 3Q14 report as well as the positive phase 3 results presented at both EASD 2015 and EASD 2014.

• According to ClinicalTrials.gov, the estimated primary completion date of Merck’s phase 1 trial (ClinicalTrials.gov Identifier: NCT02269735) on “smart” insulin candidate MK-2640 has moved back to March 2016. The call did not provide any updates on this candidate but according to our independent monitoring of ClinicalTrials.gov, the completion date has moved from January 2016 to March 2016, the second delay to our knowledge following 3Q15’s delay to January 2016 from July 2015. The study continues to have the same estimated enrollment of 74 participants. At last year’s Friends For Life meeting, 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. During Q&A, management continued to express confidence in the DPP-4 inhibitor class in the context of the positive EMPA-REG OUTCOME results for Lilly/BI’s Jardiance (empagliflozin). When questioned about the SGLT-2 impact on the DPP-4 inhibitor class, management stood by the statement that the company expects the Januvia franchise to grow globally. Management specifically pointed to post-EMPA-REG data, emphasizing that while there have been market share shifts within the SGLT-2 class, no significant shifts have been seen between classes. Moving forward, Merck expressed that it will continue to monitor this closely as labels or guidelines potentially change, but assertively shared the opinion that the DPP-4 inhibitor class will likely stand its ground. The company has held this position over a few quarters at this point and we would agree – as type 2 diabetes management can require multiple medications and providers remain very familiar with DPP-4 inhibitors, the Januvia franchise will likely hold its leadership in diabetes for the foreseeable future, although this may change as results become available from more CVOTs.

5. The overall DPP-4 inhibitor class fell 9% YOY to $2.1 billion in 4Q15 and fell 2% YOY to $8.7 billion for 2015 full year sales. Merck’s Januvia (sitagliptin) franchise leads the market by value, with approximately 68% of the market. Novartis’ Galvus (vildagliptin) holds approximately 14% of the market; AZ’s Onglyza (saxagliptin) holds approximately 10% of the market; and Lilly/BI’s Tradjenta (linagliptin) and Takeda’s Nesina (alogliptin) each hold approximately 5% of the market. However, as with Jardiance, Lilly's reported revenue for Tradjenta represents only a fraction of total sales, so the product's actual market share by value is higher – it is the #2 DPP-4 inhibitor worldwide according to BI. Of the DPP-4 inhibitors on the market, Tradjenta appears to be the only product on a consistent upward swing, which may be due to formulary strength. While the class may be losing a bit of ground with greater SGLT-2 competition and pricing pressure, we believe that DPP-4 inhibitors’ strong safety/tolerability profile and perceived familiarity by PCPs will keep the class as a major player with Januvia as its frontrunner. The new set of diabetes drug classes from the last decade allows more patients to go on therapy sooner – patients who get coverage, anyway – leading to more patients being successfully treated. A lot of work still needs to be done to prove to Medicare and payers that early access to therapy and lifestyle management for people with type 2 has major payoffs – big data should help.

Questions and Answers

Q: Can you elaborate on Januvia sales in the quarter? How much did destocking impact results?

A: I think it's important to give some additional context. I want to start by saying we're really pleased that Januvia grew 7% (as reported) in 2015. And if you look at our underlying performance in fourth quarter, it was similar to the other quarters in the year. What you saw in the fourth quarter was volume growth in the US of about 3%, which was about the same as what you saw the quarter before and so forth.

What happened was there was significant channel reductions that followed the third quarter buy-in, which was more than $100 million. And as you may recall, last quarter, the US grew 22% for Januvia, and that's why I noted that there was buy-in and we would expect to see buy-out. So when you look at fourth quarter, I would look at the underlying performance, which remains similar to the other quarters, and I think we had a good year, with Januvia showing 7% growth versus prior.

Q: More broadly, can you provide the latest thoughts on the SGLT-2 impact on the DPP-4 class, as you talk about growing Januvia in 2016?

A: When you look at 2016, despite increasing pricing pressure that we'll see in the United States and the biennial price declines that you see in Japan, we expect to grow the franchise globally when you exclude exchange. And what that means, with regard to EMPA-REG, we don't see a significant impact in 2016. In fact, if you look at the earliest data that you can look at, we're seeing market share shifts within the SGLT-2 class, but we're not seeing shifts between classes, between DPP-4s and SGLT-2s. We'll continue to monitor that closely. We'll see when there's label changes or if there's potential guideline changes. But at this point in time, we feel confident that there should not be a significant impact in 2016 from the SGLT-2 class.

-- by Melissa An, Sarah Odeh, and Kelly Close