Merck’s Frazier gets his first raise, but total package shrinks as sales stall

Merck & Co. CEO Ken Frazier has been on the job since 2011, so it’s no surprise the company decided it’s about time he got a raise. Frazier’s base salary grew by 2.5%  to $1.53 million last year, according to Merck’s newly released proxy (PDF) statement.

Too bad salary is only 10% of his compensation.

Merck’s sales were flat last year as the company faced a host of challenges, ranging from low-cost competition on some of its biggest blockbusters to a sudden decline in the market for hepatitis C drugs. And that, in turn, took a bite out of Frazier’s performance pay, pushing total compensation down to $21.8 million from $24.2 million in 2015.

Merck’s executives are paid according to a scorecard that encompasses top- and bottom-line results and pipeline milestones—and 2016 was most definitely a mixed bag. The company’s revenue (adjusted for foreign exchange rates) of $39.4 billion missed its goal of $39.7 billion. Non-GAAP earnings-per-share of $3.73 came in only slightly above its target of $3.72, according to the proxy.

As for its pipeline, Merck's one big win was its previously approved checkpoint inhibitor Keytruda, the first therapy approved by the FDA to treat patients with non-small cell lung cancer whose tumors express PD-L1. Total sales of the drug flew 148% in 2016 to $1.4 billion.

But Keytruda didn’t do much to cushion the less-than-stellar debut of Zepatier, Merck’s treatment for hepatitis C that was positioned to compete with Gilead’s blockbuster Harvoni. Zepatier brought in just $500 million in sales for the year as some payers snubbed it in favor of exclusive deals with Gilead and AbbVie.

What’s worse, the value of Merck’s hepatitis pipeline is rapidly shrinking—so much so, in fact, it was forced to take a $2.9 billion writedown in February. That cut its fourth-quarter 2016 EPS almost by half, to 22 cents.

The problem, Merck said at the time, was uprifosbuvir (MK-3682), an experimental compound it acquired three years ago when it bought Idenix for $3.9 billion. Most patients have been cured by the hepatitis C drugs that are already on the market, most notably Gilead’s Sovaldi and Harvoni. So Merck now believes uprifosbuvir’s total market potential is a paltry $240 million.

The value of Frazier’s stock awards fell to $7.9 million from $9.9 million in 2016, according to the proxy filing, while his nonequity incentive plan compensation dropped to $2.5 million from $3.4 million. His stock options came in flat at $4.8 million and his pension value increased a bit from $4.3 million to $4.8 million.

Merck is facing an uphill battle this year, as some of its biggest hit drugs are losing their patent protection. The company has been hit with generic competition to its antibiotic Cubicin and its cholesterol treatment Zetia. Its combo cholesterol med Vytorin is set to lose its patent protection this year. Leerink Partners analysts estimate that combined sales of Zetia and Vytorin will fall from $3.5 billion in 2016 to less than $1 billion by 2020.

Merck’s sales challenge is only complicated by Remicade, which is quickly losing market share in Europe to biosimilar competition.

Frazier has been racing to prop up Merck’s pipeline with a popular strategy in the pharma industry: M&A. Last June, the company picked up Afferent Pharma and its potential blockbuster to treat chronic cough for $1.25 billion. The company also bought IOmet to help boost its immuno-oncology offerings, and it formed a $200 million partnership with Moderna Therapeutics to develop cancer vaccines.

No doubt Frazier has his dealmaking radar up even more this year. Investors have been putting pressure on the CEO to continue the M&A streak, and he made it clear after reporting Merck’s fourth-quarter earnings that he’s out looking for the best strategic fits.