Januvia woes complicate Merck restructuring picture

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Anybody wondering why Merck & Co felt compelled to announce a reorganisation and new round of job cuts earlier this month should look no further than the performance of Januvia. The New Jersey group’s biggest seller is stuck in neutral, with a quarterly decline in US sales and a dimming outlook even as diabetes prevalence grows.

Management is “none too pleased” with Januvia’s execution, chief executive Kenneth Frazier said yesterday, and yet the main growth strategy appears to be a difficult task, since it involves taking share from cheaper off-patent sulphonylureas. Singulair’s loss of market exclusivity last year blew a big hole in Merck’s revenue picture, and with the diabetes franchise falling short it needs to come up with a new way to satisfy restive investors.

Sales growth needed

Regardless of its struggles of late, Januvia, and its combination with metformin called Janumet, remains the biggest growth driver for Merck; the group's next big hopes are the phase III projects, the PD-1 antibody MK-3475 (lambrolizumab) and the bone builder odanacatib, which has had a setback after reporting pivotal data (Merck’s odanacatib caution throws Amgen a bone, February 4, 2013).

Thus Januvia’s stumbles have a lot to do with Merck’s travails. The dipeptyl peptidase IV (DPP-IV) inhibitor class of which it is a part is expected to grow quickly, but Januvia, the first to launch, is the only one forecast to grow at a single-digit rate.

Analysts have knocked back their 2018 expectations significantly: $1bn has come off the EvaluatePharma consensus forecast in the past four months, and this now sits at $5.45bn. Janumet has seen a similar decline, to $2.48bn from more than $3bn five months ago.

So the announcement yesterday that Januvia had seen an 8% quarter-on-quarter decline in US sales was a seen as a bad omen; it marked the second time this year that US sales had slipped, with Q1 falling 18%. Global sales in the third quarter were off 5% compared with a year earlier, and if shifts in exchange rates are taken into account the fall is 2%.

Shares fell 3% Monday to $45.35.

Even more restructuring

Where the competition is coming from is the bigger question. It is not just the DPP-IV class that Merck needs to repel, and the pre-insulin diabetes space has gone through many shifts since Januvia premiered in 2006.

The new sodium-glucose cotransporter-2 (SGLT2) inhibitors like Invokana and Forxiga are oral drugs like the DPP-IVs. The injectable glucagon like peptide-1 (GLP-1) agonists like Victoza continue to grow at double-digit rates, and it helps that Victoza had proven itself superior to Januvia. Moreover, Victoza's owner, Novo Nordisk, has an incentive to push hard on sales since its new long-acting insulin will now not make it to the US market for years.

Meanwhile, it is not exactly a revelation that Merck’s R&D engine has not been the most productive, which is why squeezing as much as possible from its biggest seller is essential as the group prepares to cut jobs and reorganise.

The plans to trim R&D and overhead costs are explicit at this point, and in many instances are already assumed to be under way (Can Merck pull a Pfizer?, October 2, 2013). What many investors are awaiting is a clear sign that there will be more reorganisation along the lines of what Pfizer has done – shedding animal health and taking tentative steps towards a break-up or sale of less innovative divisions like consumer health.

Indeed, Mr Frazier said Merck management was looking at its own animal health and consumer care divisions “to determine whether these businesses are more advantageous inside or outside the company”. ISI Group analyst Mark Schoenebaum described that as “the strongest language yet” used by management regarding a potential divestment.

A faltering top seller can only be intensifying the pressure on Merck’s bottom line. Should the company's new plan to steal share from sulphonylureas fail to yield the growth for which management is hoping, that talk of divestment could turn to action.

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com or follow @JonEPVantage on Twitter

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