Merck analysts to CEO: What’s so great about your pipeline beyond Keytruda?

Sales of Merck & Co.’s immuno-oncology heavy hitter Keytruda soared 66% in the fourth quarter to $2.15 billion, surpassing Wall Street’s expectations yet again. But Merck can't rely solely on one blockbuster’s dutiful performance to drive sales and earnings growth going forward.

Analysts' worries about that fact only intensified on Friday after Merck put up sales projections for this year. The company said it expects 2019 sales of between $43.2 billion and $44.7 billion and non-GAAP earnings per share to hit between $4.57 and $4.72. On average, analysts were expecting sales of $44.5 billion, according to Refinitiv, so with the lower end of its guidance, Merck essentially warned the Street to tone down its expectations.

Keytruda growth helped drive total sales for the fourth quarter up 5% to $11 billion, in line with expectations. Non-GAAP EPS came in at $1.04, beating the Street’s estimate by a penny.

Analysts didn’t exactly embrace those numbers, though. Fourth-quarter results, said Credit Suisse analysts in a note to investors, are merely “good enough” given concerns that currency fluctuations and “continued investment in Keytruda might [impact] 2019 guidance.” They added that “continued strong commercial uptake of Keytruda and the release of additional positive clinical data” will be key to Merck’s ability to live up to expectations.

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Merck CEO Ken Frazier urged investors to focus on the company's long-term pipeline, which includes not only multiple market-expansion opportunities for Keytruda but also new treatments for cancer, innovative vaccines and other assets.

“In fact, Merck has one of the broadest and most promising pipelines we’ve had over the past few decades,” Frazier said at the beginning of the call.

That didn’t sit well with some analysts who were listening in, either. “What are we missing?” asked Cowen & Co. analyst Steve Scala during the question-and-answer session, after commenting that Frazier’s “broadest pipeline” assertion was “quite a statement given Merck’s rich research history.”

Frazier said the company’s long-term pipeline houses oncology medicines addressing 20 unique mechanisms, as well as opportunities that include next-generation pneumococcal vaccines. “I continue to believe that Merck’s longer-term revenue growth prospects are underappreciated,” he said.

During the fourth quarter, Merck did turn in strong performance from its vaccines unit, with sales of Pneumovax 23 growing 22% year over year to $322 million. Sales of HPV vaccine Gardasil rose 32% to $835 million, though that missed Wall Street’s projection of $877 million in sales. No doubt the high expectations were driven by Gardasil’s monster performance in the third quarter, when revenues from the HPV franchise jumped 55% to $675 million.

So for now, investors will continue to rely on Keytruda to drive sales growth. Merck R&D chief Roger Perlmutter said during the call that renal cell carcinoma and gastric cancer represent “special highlights” for expanding the product’s market. Earlier this month, the company released data showing that the drug slashes the risk of death by 31% in patients with esophageal or esophagogastric junction carcinoma who express high levels of the biomarker PD-L1. Renal cell data will be presented in mid-February, he said.

“We are expanding into new areas" and testing Keytruda in combination with Merck's own pipeline medicines and other companies' marketed cancer drugs, Perlmutter said. “So there’s just a huge set of opportunities.”

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But Merck is still under pressure to diversify its pipeline, and one way to achieve that would be to make some deals. Frazier admitted as much during the earnings call, declaring that business development is a priority for the company.

“First and foremost, we look for those scientific innovations that we believe will enhance our pipeline, because we believe that’s what important ultimately to drive long-term growth and value for shareholders,” he said. He added that in 2018, the company completed about 60 transactions “spanning licensing and technology deals, clinical collaborations,” and more. They included a partnership with Eisai and the acquisition of Viralytics, the latter of which boosted Merck’s immuno-oncology pipeline, he contended.

But that reminder did little to soothe nervous analysts looking ahead for signs of life beyond Keytruda. Wolfe research analyst Tim Anderson mentioned during the call that investors perceive Merck’s pipeline of new molecular entities to be “on the thin side.” He suggested that R&D spending on Keytruda might be grabbing resources from other opportunities. CFO Robert Davis acknowledged that the bulk of R&D spending is still devoted to Keytruda, though much of that has shifted to combination studies. Whether that will be any comfort to investors, however, is an open question.