Merck 2Q15 – Januvia up 1% to $1.6 billion; Management highlights positive TECOS results and announces plans to file omarigliptin in US by end of year – July 28, 2015

This morning, Merck held its 2Q15 financial update in a call led by CEO Mr. Ken Frazier. Below are our top five highlights from the presentation, followed by Q&A.

1. Globally, Merck’s DPP-4 inhibitor franchise (including Januvia [sitagliptin] and Janumet [sitagliptin/metformin]) grew 1% year-over-year (YOY) as reported (9% in constant currencies) to $1.6 billion in 2Q15. Sequentially, the franchise grew 15% as reported. 

2. Management highlighted the positive results from TECOS, noting that this data is being used to promote the Januvia franchise in markets throughout the world.

3. Management stated that the company plans to file its once-weekly DPP-4 inhibitor omarigliptin in the US by the end of the year.

4. Aggregate revenues for Januvia, Lilly/BI’s Tradjenta (linagliptin), and Novartis’ Galvus (vildagliptin) for 2Q15 were down 2% as reported from 2Q14 – not great news for the DPP-4 inhibitor market, but reasonable.

5. We did not hear any updates on the call regarding Merck’s phase 1 trial of “smart” insulin candidate MK-2640; in addition, Merck provided no updates on its phase 3 Samsung-partnered insulin glargine candidate (MK-1293) and Pfizer-partnered SGLT-2 inhibitor ertugliflozin (MK-8835). See our Pfizer 2Q15 report for Pfizer’s take on the partnered SGLT-2, which was a bit more expansive.

Top Five Highlights

1. Globally, Merck’s DPP-4 inhibitor franchise (including Januvia [sitagliptin] and Janumet [sitagliptin/metformin]) grew 1% year-over-year (YOY) as reported (9% in constant currencies) to $1.6 billion in 2Q15. Sequentially, the franchise grew 15% in 2Q15 but this was largely due to the payment schedule between Merck and Ono Pharmaceuticals (which pays Merck in 2Q and 4Q). Management spoke positively about Januvia’s performance, stating that 2Q15 marks the franchise’s seventh straight quarter of growth, as the company has “steadily increased resources” to drive growth. Results as reported were only modestly positive, as sales in the previous three quarters (3Q14-1Q15) ranged from $1.4 billion to $1.7 billion – see the table below for more on recent quarters’ results.

• As we have seen in most recent quarters, Janumet drove all (and more!) of the franchise’s growth: Janumet grew 7% as reported to $554 million while Januvia declined 1% as reported to $1 billion.
• By region, US revenues for the Januvia franchise grew 14% as reported YOY while international markets declined 11% as reported YOY (grew 4% in constant currencies). Regarding the US, management noted that Merck has seen underlying volume growth of about 4% and saw benefits in 2Q15 from adjustments to rebate accruals – so, the 14% was more of a one-time thing. Internationally, management pointed out that volume growth in Europe was a “key contributor to performance” (but, not dollar) and that emerging markets delivered “steady double-digit growth.” With regards to Europe, we believe that some of this growth was driven by share gains in Germany, as Novartis’ Galvus (vildagliptin) was withdrawn from the market due to G-BA/IQWiG comparative effectiveness and reimbursement decisions. Pretty much, the EU is pretty tough market.
• Sequential growth was good – although year over year growth was nothing to write home about, we do emphasize that Merck reported its third-best quarterly result ever in 2Q15.

Table 1: Januvia franchise worldwide sales

2. Management highlighted the positive results from TECOS, noting that this data is being used to promote the Januvia franchise in markets throughout the world. As a reminder, these full results were presented at ADA in June and published in NEJM. The trial met its primary endpoint of cardiovascular non-inferiority (using a composite of MACE plus hospitalization for unstable angina) and, importantly, there was no increase in hospitalization for heart failure vs. placebo. During Q&A, management pointed out that these results will help promote the franchise in applicable markets around the world; however, in the US, Merck must wait for the information to be included in the label prior to any active promotional activities.

• We expect that Januvia’s dominant position within the DPP-4 inhibitor class will be supported or even bolstered by these positive results, with AZ’s Onglyza (saxagliptin) and – to a lesser extent – Takeda’s Nesina (alogliptin) blemished by the heart failure question – fairly or not. Overall, we do see the neutral TECOS 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 class of drugs, however, 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.
• We were dismayed to hear from Dr. Allison Goldfine (Joslin Diabetes Center, Boston, MA) at Keystone that many providers have interpreted the neutral TECOS results to mean that Januvia is equivalent to placebo in terms of efficacy. Dr. Goldfine explained that the trial (which concluded with minimal difference in A1c between the two groups) really demonstrated that Januvia was equivalent to “placebo plus,” as the goal was to maintain glycemic equipoise in order to evaluate non-glycemic effects on CV outcomes. We assume that Merck’s promotional efforts should help to counter this perception to some extent. Thinking more broadly, the glycemic equipoise design of these trials is one of many reasons why demonstrating CV superiority is so challenging – as Dr. Goldfine explained, such trials would only be able to show benefit in the event of a strong, direct non-glycemic effect of a drug on cardiovascular health. We doubt that will happen – we’d love to see more Big Data on how patients with newly diagnosed diabetes (or so) fare with DPP-4 inhibitors.

3. Notably, management stated that Merck plans to file its once-weekly DPP-4 inhibitor omarigliptin in the US by the end of the year. In addition, the company briefly noted that it continues to have “good discussions” with the PMDA (Pharmaceuticals and Medical Devices Agency) on omarigliptin in Japan. As a reminder, Merck submitted omarigliptin in Japan last November and management has formerly only stated that “other geographies” were “to follow.” The candidate’s remaining ongoing global phase 3 trials are projected to end in 2015 to early 2016 with a CVOT slated to end in late 2017 (moved up late last year from 2019).

• As a reminder, positive phase 3 results presented at last year’s EASD demonstrated a comparable safety and efficacy profile with omarigliptin vs. 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. The comparable clinical profiles suggest that the different administration frequencies will be the primary differentiator between the products, and we imagine that once-weekly convenience will be valuable for many (though perhaps not all) patients. For more details on the candidate, please see our 3Q14 report.

4. Aggregate revenues for Januvia, Lilly/BI’s Tradjenta (linagliptin), and Novartis’ Galvus (vildagliptin) for 2Q15 were down 2% as reported from 2Q14. However, growth in constant currencies (for Januvia alone, this was around 9%) would have been more positive, as the US dollar has become far stronger over the past year. These three DPP-4 inhibitors’ sales totaled $1.95 billion in 2Q15, compared to 2Q14’s $2 billion. These reported figures are significantly lower than growth seen in past years. As noted in our Merck 4Q14 update, the entire DPP-4 inhibitor class grew ~10% in 2013 and ~30% in 2012 while 2014 only saw growth of 7%. Januvia has experienced impressively consistent growth in recent quarters, while other candidates have appeared to lose ground, as Novartis and AZ have even explicitly expressed intentions to move resources away from their DPP-4 inhibitors. Januvia’s competitive advantage in Germany (with Galvus withdrawn from the country’s market) has also likely contributed to the franchise’s leadership. Please see our table below for more details on each DPP-4 inhibitor’s numbers. We await 2Q15 results from AZ and Takeda (both to report on July 30) for the full picture on the class.

• The recent slowdown within the DPP-4 inhibitor class stems from a number of factors, including: (i) the growing pricing pressure from payers, driven by increased focus on cost-effectiveness; (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); (v) the reverberations of the incretin-pancreatitis/pancreatic cancer scare peaking in 2013; and (vi) nagging concerns about heart failure as a class effect, as discussed at the recent FDA EMDAC meeting on SAVOR and EXAMINE (although these may now be somewhat alleviated due to the positive results of TECOS). Potential keys to reversing this trend will be fixed dose combinations (Lilly/BI’s Glyxambi [empagliflozin/linagliptin] recently became the first DPP-4 inhibitor/SGLT-2 inhibitor combination to reach the market) and new longer-acting formulations like omarigliptin. We will not be surprised to see Merck maintain its leading position in the pack due to the positive TECOS results, providers’ familiarity with the product, and upcoming momentum with omarigliptin (which past research has suggested younger patients will find particularly appealing).

Table 2: Global DPP-4 Inhibitor Revenue Comparison

*Revenues in USD millions; values as reported

5. We did not hear any updates regarding Merck’s phase 1 trial on “smart” insulin candidate MK-2640; in addition, the company provided no updates on its phase 3 Samsung-partnered insulin glargine candidate (MK-1293) and Pfizer-partnered SGLT-2 inhibitor ertugliflozin (MK-8835). Please see below for a table outlining the details of Merck’s diabetes drug pipeline.

• As a reminder, Merck has an ongoing phase 1 trial of “smart” insulin candidate MK-2640 (ClinicalTrials.gov Identifier: NCT02269735), which we learned about in 4Q14 outside of the company’s financial update call. According to ClinicalTrials.gov, the study now has an estimated completion date of July 2015 and has an estimated enrollment of 58 participants (which remains the same as 4Q14’s estimation, although this has increased from the 40 participants originally reported in October). For more on the background on this candidate, please read our 1Q15 report. At Friends For Life earlier this month, 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.
• 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, 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). 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. Lilly/BI’s insulin glargine formulation Basaglar/Abasaglar is expected to launch in the EU later this summer; full US approval is delayed pending the outcome of Sanofi’s patent lawsuit. Biocon/Mylan have recently completed recruitment in two phase 3 trials of their biosimilar glargine formulation; both studies have expected completion dates in June 2016.
  
  • Notably, the primary completion date for the phase 3 trial in type 1 diabetes (ClinicalTrials.gov Identifier: NCT02059161) has been pushed back to November 2015. This is six months delayed from the estimated primary completion date of May 2015 as of the 1Q15 update.
• Merck/Pfizer’s SGLT-2 inhibitor ertugliflozin (MK-8835) currently has eight ongoing trials in phase 3. Three of the phase 3 trials are expected to end later this year, two in 2016, and two in 2017; the CVOT (ClinicalTrials.gov Identifier: NCT01986881) is expected to complete in 2020. 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. Indeed, Pfizer management spoke very positively during the company’s 2Q15 update this morning about the potential demand for this combination, particularly following the positive TECOS results. Lilly/BI’s Glyxambi became the first combination in this highly-anticipated class to reach the market when it was approved this past February, though the lack of attention to the product during Lilly’s 2Q15 update suggests that the initial launch may have been slower than expected. Interestingly, during Q&A, an investor expressed concern over Merck’s diabetes franchise due to the enthusiasm surrounding SGLT-2 inhibitors, to which management responded that Januvia is more of a front-line therapy than SGLT-2 inhibitors and should thus not be threatened by the drug class. 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 likely be smart for Merck in the context of the DPP-4 inhibitor slowdown.

Table 2: Global DPP-4 Inhibitor Revenue Comparison

Questions and Answers

Q: On the TECOS trial in Januvia, to what extent do you expect TECOS to have a positive impact on Januvia volumes and share?

A: With regard to TECOS, obviously, we're very excited about the result. Diabetes is an important area for us – we disproportionately invest in that area. I think that, in general, TECOS validated what physicians already were thinking in terms of the favorable tolerability profile of Januvia.

With that said, in markets around the world, we're able to promote it now. We've begun to promote it. And I think that it has a very good perception in the marketplace. In other markets like the United States, where we have to wait for it to be in the label before our representatives can actively promote the product, we're looking forward to getting the data in our label so we can promote it in the future. But, obviously, the results are helpful.

Q: On diabetes, what would the implications be in your view, if we saw positive outcomes for Lilly's SGLT-2 inhibitor?

A: With regard to SGLT-2 inhibitors, in general, if you look at the utilization of SGLT-2s, they're typically after the use of Januvia. So typically, it's metformin first, add on Januvia, and then SGLT-2 inhibitors are after you add on Januvia. So that's the way they're currently being used. I don't see a significant change. Although, obviously, we're not going to speculate on what the trial results could be for the SGLT-2 drugs. So, I still remain optimistic about our diabetes franchise.

Q: Can you talk about China a little bit? Obviously, sales were pretty good there but we're hearing a lot of slowdown in China. There's a lot of things going on there. Talk about your new product launches relative to what's happening in China and how we should expect your growth. Can we grow double digits for the next couple of years there?

A: If you look at China, we had 8% growth and we saw growth across our hospital acute care business and diversified brands. There's no doubt that we are seeing some macro trends of a slowdown, but I still believe there's significant opportunity there. We have good traction with multiple key products that we have – the products that you would think of – but we're also pursuing innovation and we're looking forward to having NRDL pricing approval for products like Januvia and Zetia in the future, which I think can be growth drivers for us in that market. So despite the macro trends, I do believe over time, that China can remain an important market for us.

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