Merck swallows $2.9B write-down of experimental hep C drug as market plummets

Merck building
Merck is taking a $2.9 billion charge on a hepatitis C drug it acquired as the potential market diminishes. (Merck)

Just how drastically is the market for hepatitis C drugs shrinking? The situation is so bad that less than three years after shelling out $3.9 billion to buy Idenix and its hepatitis C drugs, Merck is taking a $2.9 billion charge on one of the acquired compounds still in clinical trials, uprifosbuvir (MK-3682).

Merck took the write-down after estimating the potential market value of the drug to be just $240 million, it revealed Thursday in an SEC filing. “The Company determined that recent changes to the product profile, as well as changes to its expectations for pricing and the market opportunity, taken together constituted a triggering event,” Merck said in the filing. The charge, which will amount to $1.9 billion after tax considerations, slashed its previously reported fourth-quarter earnings per share from 42 cents to a loss of 22 cents.

There is little doubt the problem is more related to the hepatitis C market than it is to uprifosbuvir. The population of treatable patients has beem diminishing rapidly since the market leader, Gilead, turned what was once a chronic disease into a curable one with its drugs Sovaldi and Harvoni, which together brought in about $20 billion in sales in 2015. Add in payers demanding deep discounts and it's clear any future entrant to the hep C market will face challenges.

Merck won a major patent battle against Gilead in December 2016 when a federal jury ordered Gilead to pay 10% royalties—$2.54 billion, the largest patent-infringement verdict ever—on Sovaldi and Harvoni to Merck. That is likely to be locked in appeals indefinitely, however, and will not do much to solve bigger problems, namely the contracting market.

Earlier this month, Gilead confirmed the hepatitis C market is diminishing when it announced that 2016 sales of Sovaldi and Harvoni fell 32% and 34% year over year respectively. What’s worse, the company estimated that its total product sales for this year would be between $22.5 billion and $24.5 billion, falling way short of the $27.7 billion analysts had been expecting. Even its recently introduced Epclusa, which treats all three hep C genotypes, is failing to pick up the slack.

Merck did get its Harvoni competitor, Zepatier, on the market early last year, but it brought in just over $500 million in sales for the year. As for uprifosbuvir, Merck is still testing it in clinical trials, combining it with either one or two other compounds. The company has not provided specifics on the completion of those trials, which just raises more questions about what the true revenue potential will be when the drug finally hits the sagging hepatitis C market.

So what’s the cure for two companies battling for share of a dying market? M&A, of course. During their respective fourth-quarter earnings calls, both Gilead CEO John Milligan and Merck CEO Ken Frazier faced tough questions from analysts about whether they should boost their pipelines via acquisitions—and both made it clear they are out shopping for deals that would be good strategic fits for their companies.