Erbitux woes aside, cost-cutting lifts Q3 earnings and forecast from Merck KGaA

Merck kgaa
Merck KGaA boosted its full-year earnings forecast despite pricing pressure on one of its biggest drugs.

Two weeks ago, Germany’s Merck KGaA suffered a blow in the U.K., when the country’s cost-effectiveness watchdog NICE ruled that the benefits of its drug Erbitux in head and neck cancer do not justify its price. Now the company is acknowledging that pricing pressure is weighing down the blockbuster product, which saw its sales fall in the third quarter, from €223 million ($240 million) in the same quarter last year to €219 million ($236 million).

The company said in its earnings release that negative exchange rates were partly to blame for Erbitux’s lackluster performance, but during a conference call after the announcement, Merck CEO Stefan Oschmann told analysts there was both pricing pressure and competition in Europe—challenges he expects will continue—according to Reuters. NICE has not yet released its final guidance on Erbitux, but there’s a significant risk that if it doesn’t change its negative tune, the U.K.’s Cancer Drugs Fund could stop covering it.

To make up for those Erbitux pressures, Merck is counting on new drugs such as its Pfizer-partnered immuno-oncology treatment avelumab, and it says it's aiming for a launch every year beginning in 2017. Sales goal for those products? €2 billion by 2022.

Meanwhile, Merck managed to turn in a decent quarter and lift its earnings forecast for the year, thanks largely to aggressive cost cutting. The company reported that its sales in the third quarter were up 19% year-over-year to €3.7 billion ($3.98 billion) and its earnings before taxes, interest, depreciation and amortization (EBITDA) rose 24% to €1.2 billion ($1.29 billion). For the year, Merck expects to report EBITDA between €4.45 billion ($4.79 billion) to €4.6 billion ($4.95 billion). It had previously said to expect earnings of €4.25 billion ($4.57 billion) to €4.4 billion ($4.73 billion).

Ever since the company acquired medical equipment maker Sigma-Aldrich last year for $17 billion, it has prioritized paying down its debt. In an interview on Bloomberg TV, Merck CFO Marcus Kuhnert pointed out that the company has shaved more than $1 billion off its debt load since the end of last year. That’s not to say there won’t be pressures on the bottom line in the future, though. When asked if margin improvements are sustainable, Kuhnert said Merck’s margins on its healthcare products have improved this year, but he expects that increases in research and development costs will pressure profitability in the future.

Merck's ambitious goal to get one new medicine on the market every year would put it on track to hit that target of €2 billion ($2.14 billion) in new-drug sales by 2022. The company says it will focus on oncology, immuno-oncology and immunology as growth drivers.

The likelihood that Merck will be able to make good on that promise hinges largely on avelumab, the PD-L1 inhibitor it is developing with Pfizer. The two companies have an aggressive slate of late-stage clinical trials of the drug, including one in which it is being tried in combination with Pfizer’s kidney cancer drug Inlyta and another that’s testing it with chemo in patients with late-stage epithelial ovarian cancer.

Merck is also eyeing expansion opportunities overseas, vowing to double its workforce and sales in Africa by 2020, and breaking ground on a $115 million Boston hub over the summer. When asked by Bloomberg if the results of presidential election had changed executives’ enthusiasm for doing business in the U.S., Kuhnert said that with 25% of its employees and 20% of its sales already in the country, he expects the momentum to continue under a Trump administration.

As for pricing pressure, Kuhnert stopped sort of predicting that pressure in the U.S. would ease up with the Republicans in power. Instead he offered a bit of advice: “Merck is interested in a value-based pricing system,” he said. “I believe that in the long-term, politics has to find a way, or a compromise, on the one hand between encouraging innovation from pharma companies who are doing research and development, while at the same time ensuring that drugs can be paid [for] by the patients who need them.”