Merck CEO To Street: Watch For Short-term Adaptability, Long-Term Innovation

Newly named chairman, Merck’s CEO Ken Frazier, cites several – smallish – launches, flexibility, especially in the face of setbacks, and business development, and ongoing focus on innovation as priorities in 2012 that will lead to long-term sustainability.

Almost exactly a year ago, Ken Frazier, then Merck & Co. Inc.’s general counsel, took over the role of CEO at the company, replacing Richard Clark, who retired.

A week later, Frazier faced his first big crisis as leader: The company announced on Jan. 13, 2011, that it was discontinuing one of two pivotal trials for a key pipeline asset, vorapaxar, an oral anti-platelet agent that would be an add-on to current standard of care, which includes Plavix (clopidogrel) and aspirin in acute coronary syndrome patients. The cause was high risk of bleeding.

Analysts previously had pegged potential sales of vorapaxar, a protease-activated receptor 1 antagonist, at more than $1 billion, and the news sent the stock down slightly, with an overhang that continued throughout 2011. Shareholder return has trailed the industry in 2011– although as Frazier noted, the company ended 2011 at 10%, above the S&P 500 gain of 2%.

“It was a tough blow,” Frazier told investors at a Goldman Sachs Healthcare CEOs Unscripted conference on Jan. 5, 2012, adding that last year “couldn’t have possibly started much worse than it did.” Other, milder but also unsettling setbacks also hindered the company last year, notably its decisions to discontinue development of two late-stage compounds: betrixaban, a Factor Xa inhibitor then in Phase III, and a Phase II/III MRSA vaccine, developed in partnership with Austrian vaccine maker Intercell AG, in March and June, respectively.

Merck based the betrixaban decision not on concerns about safety or efficacy, but over the increasingly competitive environment for novel anticoagulants, which it felt would hinder return on investment, and returned rights to the asset to its partner, Portola Pharmaceuticals Inc. The decision to halt the MRSA trial came after a data safety monitoring board recommended against continuing the trial due to safety concerns and lack of efficacy (Also see "Intercell's Pipeline Setbacks Force Strategic Rethink, Highlight Downside of Option-Based Deals" - Pink Sheet, 20 Jun, 2011.).

Frazier said, Wall Street needs to judge Merck based not solely on its setbacks, but on the company’s short-term adaptability in light of those and its long-term sustainability. “The company showed a significant amount of adaptability and resilience in the face of that … and it was a positive year in terms of what got done,” he said. Merck turned in a strong operating performance in the first nine months of 2011, with 5% top-line growth and 10% bottom-line growth and a strong overall showing in emerging markets, he pointed out, noting that the company has kept pace to cut costs by $3.5 billion by 2012. Merck further announced in July that it would cut an additional $1.3 billion to $1.5 billion by 2015

“I acknowledge some shortcomings, but I think we also should be judged by how we deal with the shortcomings,” he said at the Goldman conference.

Insomnia Drug, Bridion, Emerging Markets Are Near-Term Catalysts

Responding to an investor’s question, Frazier said that catalysts for the company in 2012 include suvorexant, an insomnia drug that just completed a Phase III study, with a read-out expected in the first half of 2012, and U.S. approval of Bridion (sugammadex), a drug that reverses the neuromuscular effects of anesthesia, and which already is on the market in parts of the world. Also of note, he said, is V503, an expanded version of Gardasil for prevention of cervical cancer. That product won’t grow the cervical cancer vaccine market for Merck but should help position it to continue to hold the dominant position in the space, he said.

Suvorexant in particular is something of a surprise to the Street and not even included in many analyst models of top catalysts for the stock. The drug, a first-in-class dual orexin receptor antagonist, has a novel mechanism of action, which minimizes residual sleepiness, and showed efficacy in a Phase IIb study.

But a drug with a similar MOA, almorexant, was discontinued by its sponsors, GlaxoSmithKline PLC and Actelion Pharmaceuticals Ltd., in January 2011 due to undisclosed safety issues. It’s unclear whether those problems are part of a class effect, cautioned analysts at Morgan Stanley. If approved, the drug could yield sales of $300 million by 2015, its second full year of estimated launch, but its chances of getting approved are only 50%, the analysts said in a Jan. 4 report.

Emerging markets – where Merck expects to generate 25% of revenues by 2013 –also are a growth area, which the company has tackled largely through partnerships rather than M&A. To date, Merck derives about 18% of sales from the so-called BRIC countries – Brazil, Russia, China and India. Some of that growth comes from a branded generics portfolio, but its innovative drugs, notably the Type II diabetes drug Januvia (sitagliptin), also contribute.

Deals around assets also will contribute to growth – with Merck increasingly open to looking at Phase II and occasionally opportunistic Phase III compounds, Frazier said. Merck traditionally has sought out early-stage deals that don’t involve competitive bidding [ (Also see "Meet Merck’s Dealmaker: A Conversation With Roger Pomerantz" - In Vivo, 27 Dec, 2011.)].

Merck has an unusually high number of very large cardiovascular outcomes trials underway, with several expected read-outs in 2012 or early 2013 (Also see "Despite Recent Setbacks, Merck's CV Pipeline Is Strong" - Pink Sheet, 29 Apr, 2011.). These include IMPROVE-IT, which is comparing the abilities of two Merck drugs, Vytorin (a combination of two Merck anti-cholesterol drugs, Zetia (ezetimibe) and Zocor (simvastatin) which is generic) versus simvastatin alone to lower LDL cholesterol and improve cardiovascular outcomes, and HPS2-THRIVE (Also see "Merck Looks Beyond First-In-Class Only As It Seeks To Bolster R&D Productivity" - Pink Sheet, 28 Nov, 2011.). An IMPROVE IT interim analysis for efficacy is planned for first quarter, when 75% of primary pre-specified clinical endpoints would have occurred, with the study completion officially set for June 2013, although that could be delayed because the trial is event driven. HPS2-THRIVE, which evaluates the ability of a 2-gram dose of Tredaptive (Abbott Laboratories Inc.’s HDL-raising niacin/ Merck’s novel anti-flushing agent laropiprant) to prevent heart attacks, stroke, or revascularization events in 25,000 patients with pre-existing vascular disease, against 40 mg simvastatin or 10 mg ezetimibe alone, is expected to complete in 2013, as well.

Frazier admitted that the company is heavily invested in unpredictable cardiovascular outcomes trials, but emphasized that this is due to regulatory demands placed on drugs already in its portfolio and is not likely to be the situation long-term. “It’s a risk worth taking in the instances we have, but I don’t think you should view that as necessarily the way the future pipeline of Merck will be rolled out,” he said.

The company is highly confident about the outcomes benefits of these assets, he added, as well as that of a cholesterol ester transfer protein inhibitor (CETP), anacetrapib, which is in Phase III for atherosclerosis, with completion slated for January 2017. Near-term investor perception of that drug may hinge on the read-out of a Phase III study of a similar Roche drug, dalcetrapib, slated for the first half of 2012 (Also see "Phase II Preview For Roche's Dalcetrapib May Give CETP Inhibition A Boost" - Pink Sheet, 23 Aug, 2011.).

These are “high-risk, high-reward” situations, and “obviously it takes a lot of money to go forward with these kinds of outcomes studies, and in the vorapaxar situation, we didn’t get good data,” Frazier said. “But the fact of the matter is, if you do get that data, you come to market in a way that can really provide significant ramp-up because … you’re selling a drug based on a provable benefit.”