Merck 1Q14 – Januvia franchise grows 3% YOY to $1.3 billion; Januvia’s position in US “stabilized” – April 29, 2014

This morning Merck CEO Ken Frazier led the company’s 1Q14 financial results call. Acknowledging the many companies reporting today (others related to diabetes and obesity include Sanofi, BMS, Zealand, Forest, Array, Alere, and GI Dynamics), Merck held an abbreviated call today focused on the company’s financials. Merck scheduled an investor briefing on Tuesday, May 6 in Boston (live webcast available), which will provide a more thorough update of Merck’s R&D efforts. Below are our top five highlights the call, followed by highlights from Q&A. We will be back next week with details on how Merck’s pipeline is progressing. As a reminder it includes a phase 3 SGLT-2 inhibitor (ertugliflozin), collaboration agreement with Pfizer (which theoretically could be in flux due to a potential Pfizer takeover of AZ); a phase 3 once-weekly DPP-4 inhibitor MK-3102 (omarigliptin); a phase 3 biosimilar insulin glargine MK-1293, collaboration agreement with Samsung Bioepis; and a preclinical glucose responsive insulin SmartCells insulin. Here are our top five highlights:

1) Worldwide, the Januvia franchise grew 3% year-over-year (YOY) as reported and 5% in constant currencies to post 1Q14 revenue of $1.3 billion. Merck characterized this growth as “solid,” though it is well below the double-digit growth the franchise experienced before 1Q13. Sequentially, the franchise’s revenue dropped quite steeply, just under 20%. However, 1Q has historically been a challenging quarter for Januvia, in part, because Merck’s distributor in Japan Ono Pharmaceuticals only pays Merck in 2Q and 4Q. (Merck also makes direct sales to wholesalers in Japan, such that it does still record some revenue from the important country each quarter.)

2) In line with previous trends, Janumet drove the franchise’s overall growth (worldwide sales were up 16% YOY to post $476 million in revenue) while Januvia monotherapy declined almost 3% (earning $858 million). This reinforces our thought that combination therapy is becoming more and more important.

3) Positive news came from the US where Merck is confident Januvia’s positioning has “stabilized,” following the entry of many other DPP-4 inhibitors. Franchise sales rose (for the first time since 2Q13) 4% YOY at $687 million. Notably, Januvia’s new-to-brand share is “doing better” and its new-to-brand volume increased in March.

4) Internationally, results were more negative, with the Januvia franchise posted its second weakest ex-US YOY growth ever – sales inched up 2.1% to reach $647 million. This increase was driven by double-digit growth in Europe (surprising) and emerging markets, offset partially by Japanese wholesalers delaying their purchases of Januvia until after the April 1 price reductions. 

5) A major insight on Merck’s diabetes pipeline came during Q&A, when Merck indicated that the Data Safety and Monitoring Board for the CVOT of Januvia TECOS looked at the rate of congestive heart failure hospitalization and reported no reason to modify or discontinue the study. Additionally, Merck’s pharmacovigilance for Januvia has not detected a signal for congestive heart failure.

Top Five Highlights

1. Merck characterized Januvia’s 3% YOY growth (5% constant currencies) to $1.3 billion as “solid,” suggesting single-digit growth for the franchise could be the new normal. For context, this level of growth contrasts with the ~15-35% YOY growth (varying across quarters) the franchise was posting in 2012. However, Januvia sales slowed considerably during 2013, recording YOY changes ranging from -4.9% (in 3Q13) to 1.4% (in 2Q13). Merck accounted for the shift being largely due to the drying up of the “thiazolidinone [TZD] opportunity” – Merck drove a high TZD to Januvia conversion rate following the recognition of safety concerns for that class – which resulted in both a slowing rise in script demand and a difficult set of YOY comparisons. Other factors that have likely contributed to the slowing of the Januvia franchise include the increasingly competitive and saturated DPP-4 inhibitor market, the entry of SGLT-2 inhibitors, and probably, to some extent, the pancreatitis scare of 2013. That Merck characterized this results as “solid” implies that while the company is certainly working to expand Januvia’s sales (in the past, Merck has stated its strategy is to carve into the sulfonylurea market). Indeed, in 1Q13, Merck guided for mid-single digit growth for the Januvia franchise.

• Januvia faced a sharp sequential decline of almost 18% in 1Q14, though 1Q has a history of being a particularly difficult quarter for the franchise – for example, in 1Q13 the sequential drop was almost 19%. This trend is driven in large part by the agreement Merck has with its Japanese distribution partner Ono Pharmaceutical: Merck only records revenue from Ono in 2Q and 4Q each year, causing revenue to be superficially high every 2Q and 4Q and low in 1Q and 3Q. Merck does not consistently report the amount it receives from Ono each half year, however, in 2Q13 it received ~$80 million – quite substantial. Additionally, a 1Q/3Q-low, 2Q/4Q-high trend exists in US revenue too, suggesting that larger forces contribute to this quarterly fluctuation. Beyond these continued historic trends, Merck noted that Japan’s bi-annual price reductions occurred the beginning of April, and it saw many wholesalers (though whom Merck also makes direct sales outside its partnership with Ono) delay purchases until these occurred. Thus, this purchasing behavior seems to have exacerbated the sequential drop the Januvia franchise faced.

Table 1: Januvia franchise worldwide results

2. Continuing previous trends, the Januvia franchise’s growth was driven by improved sales in Janumet. While Janumet rose 16% YOY to $476 million, Januvia monotherapy declined almost 3% to $858 million – its lowest result since 3Q11 when it recorded $846 million. Sequentially, Janumet declined 5% and Januvia monotherapy dropped a striking 24%. However, similar to the overall franchises’ trends 1Q (and 3Q) tend to be particularly challenging for Janumet and Januvia, due in part to the Japanese payment scheme. Without total script (TRx) data for Januvia and Janumet is unclear to what Janumet is cannibalizing Januvia’s sales – our suspicion is that while this is occurring to some extent, it does not fully explain the trends. Regardless, we believe the contrasting trends seen in Januvia and Janumet’s results over the past year are one indication that fixed-dose combinations are a valuable component of a diabetes portfolio, and we expect to see many more of them in the future.

Table 2: Breakout of Januvia monotherapy and Janumet worldwide results

3. In an encouraging turn of events, Januvia franchise sales increased in the US for the first time since 2Q13 and Merck expressed confidence that it has “stabilized” Januvia’s positioning in the US, following the entry of many other DPP-4 inhibitors. The franchise was up over 4% YOY to reach $687 million, though this represented an almost 12% sequential drop. This sequential decline is in line with Januvia’s previous 1Q/3Q vs. 2Q/4Q trend in the US, though it is unclear why this variation exists in the US since domestic sales should not be impacted by the Japanese payment schedule. Merck attributed “a couple points” of the 4% YOY growth to an improvement in price. Additionally, Merck saw “some increase” in inventory, which was partially offset by a “small decline” in TRx volume. Considering the reduction in TRx volume in the US, Merck noted that this measure has been better in April, than it was in March; and that March was better than the prior three months. Thus, the TRx volume “certainly” has stabilized, and Merck is now focused on trying to improve it on a yearly basis again. Notably, Januvia’s new-to-brand share (i.e., the proportion of people taking a new drug who are taking Januvia) is “doing better” and its new-to-brand volume (i.e., the number of people taking Januvia for the first time) increased in March – the first time Merck has seen this rise in “a very long time.”

• Both Januvia monotherapy and Janumet contributed to the franchise’s domestic improvement, though Janumet took the lead with an 8% YOY rise versus Januvia’s 3%. Over 1Q14, Januvia raised $474 million and Janumet earned $213 million in the US.

Table 3: Januvia franchise US results

4. However, internationally the story was grimmer with the franchise posting its second weakest ex-US YOY growth ever. In 1Q14, ex-US sales scooted up 2.1% to reach $647 million; 2Q13 was a slightly weaker quarter for the franchise internationally with 1.9% YOY growth (from a pretty comparable base of $726 million in 2Q12 and $740 million in 2Q13). The sequential drop was dramatic as -23%, but as mentioned above this can be deceptive due to Merck’s payment schedule in Japan. On the call, Merck highlighted double-digit growth in franchise revenues in Europe and emerging markets. However, these improvements were partially offset by Japanese wholesalers reducing their inventory levels in Japan in anticipation of the July 1 price reductions. During Q&A, Merck noted that it has seen the wholesalers begin to purchase Januvia stock again in April.

• Notably, Januvia monotherapy dropped 9% YOY abroad (to reach $384 million). Overall sales only increased thanks to Janumet’s strong performance as denoted by a 24% YOY boost (to $263 million).   

Table 4: Januvia franchise ex-US results

5. A major insight on Merck’s diabetes pipeline came during Q&A, when Merck indicated that the Data Safety and Monitoring Board for the CVOT of Januvia TECOS looked at the rate of congestive heart failure hospitalization and reported no reason to modify or discontinue the study. Additionally, Merck’s pharmacovigilance for Januvia has not detected a signal for congestive heart failure. For context, the CVOT for AZ’s Onglyza (saxagliptin) found a statistically significant association between the use of Onglyza and hospitalization for congestive heart failure – but not for mortality due to congestive heart failure. Additionally, the CVOT for Takeda’ Nesina (alogliptin) suggested a similar trend, thought it did not reach statistical significance. As a result, KOLs have suggested that the increased risk for congestive heart failure might be a class effect of the DPP-4 inhibitors. TECOs has enrolled about 14,000 people (who are relatively more healthy than those enrolled in Onglyza and Nesina’s trials) and is expected to read out in 2015.

Questions and Answers

Q: On Januvia, it came in a little bit weaker, than consensus was looking for. In the US, you've taken I believe more than 20% in price increases at least on a list price basis, but you don't report that obviously in the US number, so I'm wondering if you can just talk about net US pricing trends going forward with the DPP-4s?

A: Ex-foreign exchange, we had 5% growth and if you look at the US, we had 4% growth. We had a couple points that came through on price and we had some increase in inventory as well. That was partially offset by a small decline in TRx volume. If you look at TRx volume in the US, we've seen this month is better than last month, and last month was better than the prior three months. So we've certainly seen a stabilization of the TRx volume when you look at it year-over-year, and now we're looking to see if we can actually turn it around. If you look at new-to-brand share, we're actually doing better, and if you look at new-to-brand volume, we've actually seen an increase in the month of March, which is the first time we've seen an increase in new-to-brand volume in a very long time. So it's still early yet, but we feel like we've certainly stabilized the U.S. and now we're looking to see if we can actually grow TRx again.

Q: Internationally, Januvia sales seem to be on the weaker side. I'm wondering what the driver of this was.

A: We had very good growth in the emerging markets and in Europe. If you look where we saw some softness, it was in Japan, and the reason why is because wholesalers stopped purchasing or reduced purchases prior to the repricing that took place. And they're beginning to repurchase again in April.

Overall, the diabetes market continues to show reason for strong growth. If you look at the epidemiologic incidents, if you look at governments around the world and the importance that diabetes plays in their overall health care expenditure, the market certainly shows why it should grow. And we're going to continue to invest strongly in the marketplace to not only be successful outside the US, but do everything we can to increase our success in the US.

Q: Can you talk about the timing of top-line data from the TECOS trial [the CVOT of Januvia]? Can we think about that possibly as a third quarter event, and can you discuss the what-if scenario whereby TECOS may show a heart failure signal like we've seen with one or more of the other DPP-4 inhibitors in the category?

A: We continue on track with that trial for 14,000 patients studied. But I need to point out, of course, that it is an event-driven trial, and so those events ultimately drive timing. We're not seeing anything that suggests to us that there will be an acceleration in terms of the readout of that trial earlier this year, so it continues on track.

Then with respect to any signals that one might see in that trial, there has been an interest in the question of the specific finding of heart failure hospitalization based on other studies. Understandably, we have looked at it both in terms of our pharmacovigilance activities and the Data Safety and Monitoring Board has looked at it with respect to the TECOS trial, because these are adjudicated events. At their most recent meeting, which was at the end of last year, they reported no reason not to continue the study as planned, and we've seen no evidence of a signal in our pharmacovigilance study. So we're not seeing anything there. We'll wait to see the final data. We're hopeful that the trial will complete at the end of the year.

--by Hannah Deming and Kelly Close