Bloomberg News

Merck KGaA Boosts Stock With Job Cuts Amid Drug Drought

March 10, 2013

The next drug approval for Merck KGaA (MRK), Germany’s second-biggest drugmaker, probably won’t come until 2016, more than a decade after the blockbuster cancer treatment Erbitux reached the market.

Since Erbitux won clearance in 2003, the Darmstadt, Germany-based drugmaker has had several development setbacks, punctuated by the scrapping of cladribine, an experimental treatment for multiple sclerosis that had been its most promising.

“I don’t think we have seen all the failures yet,” Martin Voegtli, an analyst with Kepler Capital Markets SA in Zurich, said in an interview. He recommends selling the stock.

Merck hasn’t needed new medicines to return an average of 25 percent a year over the last three years. The company bought lab equipment and water purification maker Millipore in 2010 and cut jobs to boost margins. Merck reported earnings that beat analysts’ estimates, forecast higher profit this year and next, and raised its savings target on March 7. The stock closed March 8 at the highest level since it started trading in 1995.

The restructuring and the future potential of the company’s liquid-crystals business, the world’s largest, led Andrew Whitney, a UBS AG analyst in London, to recommend buying the shares even though he has “little pipeline contribution” in his estimates, Andrew Whitney, a UBS AG analyst in London, recommends buying the shares based on he wrote in a March 4 note.

New Management

Merck has replaced more than a third of the company’s top executives since Jan. 1, 2011, bringing in drug development experience from Novartis AG (NOVN), Roche Holding AG (ROG) and GlaxoSmithKline Plc. (GSK) Merck hired Matthias Zachert as chief financial officer from Lanxess AG (LXS), a German chemical company. Stefan Oschmann, formerly of Merck & Co., which isn’t related to Merck KGaA, replaced Elmar Schnee as head of pharmaceuticals.

The company saw the late-stage pipeline products developed under the former research management as “high risk” and never included them in forecasts, Karl-Ludwig Kley, chief executive officer, told reporters March 7.

“I hope the headlines about problems with Merck’s pipeline are a thing of the past,” said Kley, who has headed the family- controlled chemical and pharmaceutical company since 2007.

The company last week said it would end development of experimental tumor-fighting drug cilengitide after it failed to help patients with a form of brain cancer in a late-stage clinical trial. In December, Merck said Stimuvax, a therapeutic cancer vaccine, didn’t help non-small cell lung cancer patients live longer.

Older Products

Sales of multiple sclerosis treatment Rebif, approved in 2002, and Erbitux have been the main moneymakers for the Merck Serono drug division, contributing 1.9 billion euros ($2.5 billion) and 887 million euros respectively last year. Rebif, which is injected, faces increasing competition from newer MS therapies such as Novartis’s Gilenya pill.

Erbitux has been approved for head and neck cancer and colorectal cancer. It failed to help patients with stomach tumors and was rejected for use in lung cancer in Europe, curbing its growth potential.

Atacicept, a drug licensed from ZymoGenetics Inc., is being tested in a mid-stage trial for lupus and preliminary data is expected in the first half of the year. Stimuvax is still being tested in lung cancer in a late-stage trial in a subgroup of patients who appeared to respond to it. Voegtli hasn’t forecast sales for either drug because he doesn’t believe they will be approved, he said.

Weak Pipeline

“Our view on the pipeline has not changed,” Voegtli said. “It’s very weak.”

Last year the company licensed TH-302, a cancer drug being tested in late-stage trials for soft tissue carcinoma and pancreatic cancer. Merck also is testing an MS pill licensed from Japan’s Ono Pharmaceutical Co. (4528) called ONO-4641. Those two therapies and Sym004, a cancer drug Merck licensed from Symphogen A/S in September for $625 million, were highlighted by Annalisa Jenkins, the company’s head of global drug development, for analysts March 7 on a call.

“What they’ve tried to do is in-license products but Phase III candidates are sparse, so I think Merck Serono will suffer over the next few years,” Voegtli said, referring to the last of three phases of drug development.

Sales Forecast

Voegtli forecasts peak annual sales of TH-302 of 260 million euros by 2020 which “won’t be able to offset the sales declines for Erbitux and Rebif,” he said. The drug will likely face competition from Celgene Inc.’s Abraxane, he said. He expects Merck Serono sales to be flat in 2014 and fall 1 percent in 2015 and 2016 and decrease by 2 percent in 2017.

The company needs “sustainable growth” at the Merck Serono division, Michael Leuchten, an analyst with Barclays Capital, wrote in a note March 4. Merck shuttered the Geneva headquarters of the unit, which it bought in 2007.

Kley said previously that the company would consider bolt- on acquisitions and licensing deals and no large “transformational” acquisitions or material divestments until 2014. The company plans to invest an almost triple-digit million-euro amount in biosimilars this year and wants to focus research on the areas of cancer and immune-related illness.

“We assume every project we add to Phase I and II bears the real possibility it will get approved,” Kley said March 7. “Of course we can’t be 100 percent.”

To contact the reporter on this story: Allison Connolly in Frankfurt at aconnolly4@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net


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