Merck (MRK, Financial), the fourth-largest health care company in the U.S., is going through the same problem that is plaguing all the top pharmaceutical companies around the world: declining revenue. Merck’s revenue in the first half of the current fiscal declined from $19.21 billion last year to $19.15 billion.
In percentage terms the decline is small compared to that of its rivals, and it’s clear that the company is fighting to build a blockbuster portfolio that can offset the effect of products that went off patent over the years. The flat growth has indeed helped the company look better than its peers in the eyes of health care investors, who have rewarded the company with near 30% return in the last year.
Merck’s revenue streams can be divided into two parts: its Pharmaceuticals segment, which includes vaccines, and Animal Health, Healthcare Services and Alliances.
The Pharmaceuticals segment is the one that does the heavy lifting, bringing in $16.904 billion in sales in the last six months, while the Other segment, which includes Animal Health, Healthcare Services and Alliances, brought in $1.883 billion during the same period.
Vaccines brought in $2.329 billion, accounting for nearly 13.8% of total pharmaceutical sales, showing modest growth of $18 million in sales during the period. Vaccines is a highly underserved market due to low margins and high cost of production. Many companies have gotten out of the vaccines game citing profitability as the biggest issue, but things are slowly changing now. Merck does have a solid vaccines segment that may not offer prolific growth but can act as a stabilizer to overall revenues.
“One estimate puts the vaccine market now at $24 billion — huge but a mere 2% to 3% of a trillion-dollar worldwide pharmaceutical industry.” – Atlantic
It’s clear that Merck’s short- to medium-term performance will depend on its pharmaceutical segment led by blockbuster products Januvia, Janumet (diabetes) and Zetia (cardiovascular). Remicade, its blockbuster immunology drug that went off patent early this year, saw its sales nosedive from $956 million in the first half of last year to the current $688 million. The loss of Remicade and Isentress sales due to competition is the primary reason behind Merck’s flat growth numbers this year.
Despite the problems facing its blockbuster drugs Merck has been able to stay stable, and the company is now focusing its attention on oncology treatment Keytruda and hepatitis C treatments Zepatier and Bridion.
“We have momentum in our four focus areas and strong execution for our key launches. This positions us well for the second half of 2016 and for 2017.” – Merck second-quarter earnings call
Though some of the key products went off the boil, Merck does have enough products in its portfolio that are showing stable growth. There are also a few products that are growing fast. Things do not look rosy for the company in the short term, but it does not look bad enough to force the company’s hand and make it consider big-ticket acquisitions. The company seems to be ready to tide over the patent cliff as well as feed off the competition, which is possibly why the stock is up more than 17% since the start of year despite Merck reporting flat sales.
Disclosure: I have no position in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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