Bloomberg News

Merck KGaA Eyes U.S. as Emerging Market for Drug Business (2)

July 01, 2013

Merck KGaA (MRK), the German drugmaker whose U.S. unit was expropriated almost a century ago, is turning back to that market as competitors focus on emerging economies in Asia and South America.

“For us, the U.S. is an emerging market,” Stefan Oschmann, head of pharmaceuticals, said in an interview. “We have huge growth potential in the U.S.”

Merck KGaA is focusing on one of the world’s most profitable drug markets as sales of its best-selling medicines slow and as a late-stage drug pipeline dries up. The Darmstadt-based company hasn’t had a treatment approved since the go-ahead in 2003 for the cancer drug Erbitux, which it sells under license outside North America. Its next market candidate won’t be considered by regulators until 2016.

The German company’s growth in North America was curtailed when its U.S. subsidiary was expropriated during World War I. Since then, that business, Merck & Co., has blossomed into the country’s second-largest drugmaker. While the two pharmaceutical companies now aren’t related, the German drugmaker is relying on Oschmann, who formerly was president of emerging markets at Whitehouse Station, New Jersey-based Merck & Co., to revamp its drug development programs.

Beefing Up

Oschmann said Merck plans to beef up its early stage pipeline through licensing and research alliances and is looking for bolt-on acquisitions while reviewing assets. He was hired in 2011 following the failure of the company’s multiple sclerosis pill cladribine. Since then, Merck has closed sites, cut and transferred jobs and refocused research on cancer, immunology and neurodegenerative disease.

The stock rose 1.2 percent to 118.50 euros at 12:33 p.m. in Frankfurt, bringing the 12-month return to 53 percent. That compares with a 26 percent gain in the Bloomberg Europe Pharmaceutical Index, including reinvested dividends.

The pipeline was “skewed” about 2 1/2 years ago, with many “high-risk” programs in the third and final stage of development, requiring big investments, Oschmann said. The company hadn’t spent as much on earlier stages of development nor sought licenses for many other drugs, according to the executive.

New Products

“This is what we wanted to change,” he said. “Being successful in the U.S. means that we have to introduce new products.”

Merck said in May it’s more than doubling the size of its venture capital fund MS Ventures to 100 million euros ($131 million). Oschmann traveled to Boston in recent weeks to meet with biotechnology companies about the benefits of working with his company.

The German drugmaker has slowly built back a presence in North America, where it had pharmaceutical sales of 1.3 billion euros last year. Still, its product offering in that market is “weak,” as traditionally Merck KGaA has worked through alliances there, Oschmann said. Erbitux is sold by Bristol-Myers Squibb Co. (BMY:US) and Eli Lilly & Co. (LLY:US) in the U.S. while the Rebif multiple sclerosis drug is co-marketed by Pfizer Inc. (PFE:US)

The company aims to market its own drugs in the U.S. as it has the potential to drive its own business, Oschmann said.

‘Not Weak’

“We’re not weak in terms of our organization there,” he said.

Analysts’ expectations about sales when he arrived at the family-controlled chemical and pharmaceutical company were “overly pessimistic,” Oschmann said. Rebif has maintained steady sales amid newer, competing therapies for MS.

“I saw that there was upside and I think we have delivered on this so far in a very consistent way,” he said. “I also saw that the current portfolio would have more resilience than what most people assumed.”

Expectations for TH-302, a cancer therapy being tested in late-stage trials for soft tissue sarcoma and pancreatic cancer, and multiple sclerosis treatment ONO-4641 are “low,” Goldman Sachs analysts wrote in a note June 20 when they recommended selling the stock. Oschmann said TH-302 is “high risk and high reward” given the diseases don’t have adequate treatments. The company will decide by year end whether to pursue a late-stage trial for ONO-4641 and is talking to regulatory authorities about whether there’s an approach that “makes sense.”

Not Dead

Merck spent more than a decade developing a therapeutic cancer vaccine called tecemotide before data from a late-stage trial showed it failed to help lung cancer patients live longer. Merck is still testing the vaccine in Asia and will make a decision on whether to start another late-stage trial by year-end, pending the outcome of talks with regulatory authorities, Oschmann said.

“We need to define a clear regulatory pathway for this,” he said. Merck is considering targeting subgroups of patients who may respond better to the treatment. “The message really is, the program isn’t dead.”

Either way, Merck intends to continue working on immunotherapies, or treatments that teach the immune system to fight cancer. The company announced last week it’s establishing an immuno-oncology unit to develop such treatments. Merck has an immunotherapy candidate in early-stage testing which Oschmann highlighted as promising. Bristol-Myers, Roche Holding AG and Merck & Co. (MRK:US) are also developing immunotherapies.

“This is the battle royale in oncology,” said Oschmann, who studied veterinary science and owns competitive horses. “It’s going to be a very interesting race.”

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

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


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