Merck beats Q1 estimates as Keytruda sales double—but some analysts want more

Keytruda
Immuno-oncology hit Keytruda shined in the first quarter, but analysts hope the market will expand even more.

Merck is the victim of its own success, judging from its first-quarter report. The company beat sales and earnings estimates, and it upped its guidance for the year, despite some significant suffering from generic competition. Sales of its hit immuno-oncology drug Keytruda skyrocketed 134% to $584 million during the quarter.

But that wasn’t good enough for analysts, who were expecting even more from Keytruda. They had predicted the product would haul in $615 million during the quarter. And on Tuesday, analysts pounded Merck research chief Roger Perlmutter, M.D., Ph.D., with questions about its efforts to expand Keytruda’s market.

Merck is combining Keytruda with other drugs in multiple ongoing clinical trials—and analysts wanted to know not only more about those trials, but also when they could get their hands on the results.

The Keytruda concerns overshadowed what would have otherwise been considered a solid quarter. Merck’s sales were up 1% to $9.4 billion and its net income was flat at $2.4 billion or 88 cents per share on a non-GAAP basis—beating the consensus estimate of 82 cents.

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Merck also narrowed and raised its sales estimate for the year to $39.1 billion to $40.3 billion, compared with its previous estimate of $38.6 billion to $40.1 billion. It now expects non-GAAP EPS to come in between $3.76 and $3.88, up from its previous guidance of $3.72 to $3.87.

HPV vaccine Gardasil led the standout performances of the quarter. Sales were up a whopping 41% to $532 million, significantly outperforming the $361 million that analysts had predicted.

That helped cushion the blows to Vytorin and Zetia, Merck’s cholesterol meds that are now under full attack from generic competition. Sales of Vytorin fell 13% during the quarter to $241 million, while Zetia slid 46% to $334 million. The two drugs, which together brought in $3.7 billion in sales last year, will fall below $1 billion in annual sales by 2020, Leerink Partners predicts.

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Then there’s Remicade, which is facing new biosimilar competition in Europe. Its sales fell 34% to $229 million in the first quarter. Merck also lost patent protection on its antibiotic Cubicin and allergy spray Nasonex. All together, generic competition shaved $686 million off first-quarter sales versus the same period last year, the company said in its earnings release.

The generic blow has been so damaging that Merck CEO Ken Frazier continues to face pressure to prop up the pipeline with M&A. The company has already bought cough-drug maker Afferent and immuno-oncology startup IOmet, but during the conference call, one analyst asked Frazier directly why the company wasn’t doing more.

His answer: The most interesting assets are too expensive. “The challenge really is that we have to be diligent about finding the right assets at the right valuation, and we’re confident that if we remain disciplined we will be able to identify the kinds of assets that create long-term value for our shareholders,” Frazier said.

Still, most of the discussion during the conference call centered on Keytruda. During the quarter, the FDA approved the product for refractory Hodgkin lymphoma, and the European Commission gave it a thumbs-up for first-line treatment of non-small cell lung cancer (NSCLC). The FDA is expected to make approval decisions for Keytruda in bladder cancer on June 14 and for the drug combined with chemo in advanced NSCLC on May 10.

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When asked during the earnings call how confident he was about that May 10 approval, given the NSCLC data, Perlmutter declined to make any predictions. An on-time approval would put Merck ahead of Roche, Bristol-Myers Squibb and AstraZeneca, all of which are testing rival combinations.

And if Merck gets the FDA’s blessing, its market for Keytruda could significantly expand to include all patients with nonsquamous NSCLC sans EGFR or ALK mutations. One analyst questioned whether the company should consider opening additional trials, to collect more data supporting the Keytruda/chemo combo—an idea Perlmutter pooh-poohed.

“We’ve been working closely with the agency, there’s been good dialogue on the results and analysis,” he said. “I would say we have a very strong data set that stands on its own. Frankly it doesn’t make a lot of sense to start opening up additional clinical trials at this point.”

Merck has multiple combination trials underway with Keytruda. In April, Merck expanded a deal to test the drug with Incyte’s IDO1 inhibitor epacadostat in four cancer types. It’s also testing Keytruda alongside Tesaro’s PARP inhibitor and Amgen’s virus-based drug Imlygic.

In fact, said Perlmutter at the end of the earnings call, he predicts combinations of Keytruda with other immune-boosting drugs will prove most fruitful in the long run, even though the Street is focused on the short-term FDA approval of the chemo combination.

“While we recognize that chemotherapy has evolved over a period of decades and is effective in a lot of different tumor types and provides meaningful responses, the goal has been to actually change the shape of the survival curve for patients with malignant disease,” Perlmutter said. “The thought is that in combination with other immuno-active agents, particularly those that have relatively minimal toxicity, we’ll be able to change those curves still further."

"In the best circumstance," he added, "ultimately the role would be to have Keytruda in combination with these other agents end up being first-line across a broad spectrum of malignant disease.”

In light of Merck’s patent cliff, that scenario can’t come soon enough for the company’s impatient investors.