ViewPoints: Merck & Co. breaks rank by cutting its full year guidance due to COVID-19

Does the company’s uniquely-positioned product portfolio, which is heavily indebted to hospital-administered drugs and vaccines, cast Merck away from the pack or are other manufacturers overly optimistic in their assumptions for a return to normality and full year revenue growth?

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Three large-cap pharma companies reported their Q1 results on Tuesday, outlining notably different levels of expectation for the remainder of 2020.

Novartis

Following a trend established by other drug manufacturers (see Spotlight On: The impact of COVID-19 on pharma’s financials – the story so far) Novartis reported on Tuesday that first quarter revenue growth was boosted to the tune of $400 million by forward drug purchasing prompted by the COVID-19 pandemic.

This is likely to be reversed over the remainder of 2020 as the impact of social distancing measures is felt, the company said, though full year guidance has been maintained.

Analysts at Wolfe Research noted that Novartis is “firing on all cylinders,” with Q1 results serving to reinforce the status of key growth drivers such as Cosentyx (psoriasis) and Entresto (heart failure) as being both important to patients and perceived as standard of care therapies for physicians.

Where the company may struggle over the next few quarters, they caveated, concerns adoption of new products which is likely to have slowed more materially as a result of the pandemic. Having secured FDA approval last year for five drugs it expects to become blockbusters, Novartis may find itself uniquely exposed to this headwind.

Pfizer

Fuelled by strong growth performances for the anticoagulant Eliquis (which it co-markets with Bristol-Myers Squibb) and the breast cancer treatment Ibrance, Pfizer described its first quarter results as highlighting the “resiliency of our business even during the most challenging times.”

It benefited from a smaller increase in sales resulting from COVID-19 demand for certain drugs, worth approximately $150 million, but faced a separate headwind in the form of generic erosion to sales of its blockbuster pain therapy Lyrica in the US market.

Investors will be particularly pleased to have seen continued strong growth for Pfizer’s TTR familial amyloid polyneuropathy treatment Vyndaqel/Vyndamax, which looks well positioned to become a blockbuster in its first full year on the market. Management noted that approximately 4,600 patients are now receiving the drug though cautioned that its launch in Europe will be impacted by COVID-19, particularly as use requires specific diagnostic testing.

Maximum impact from social-distancing measures implemented in response to the COVID-19 pandemic will be felt during the second quarter, Pfizer said, with a rebound expected thereafter. Framed by these assumptions and despite only seeing a net benefit worth 1% of revenues in Q1, the company has maintained its full year guidance.  

Merck & Co.

By comparison – and breaking stride from most other Big Pharma companies to have reported first-quarter earnings – Merck & Co. said on Tuesday that it was cutting its full year guidance by $2.1 billion despite a strong performance in Q1 which was driven primarily by its cancer treatment Keytruda.

Use of Keytruda across multiple cancer indications may continue to expand impressively but growing dependency on the franchise (which accounted for 30% of Merck’s pharma sales in Q1 versus 23% a year ago) is partly to blame for the company’s cautious outlook.

Even oncologists are delaying new treatment starts, Merck said during a conference call to discuss its earnings, suggesting that the brunt of any impact on revenues will be seen in the second quarter.

Explaining its guidance cut, which comprises an unfavourable impact in revenues of approximately $1.7 billion for its pharmaceuticals business and approximately $400 million for its animal health business (a sector the company is uniquely exposed to among its peers) Merck noted that around two-thirds of the drugs it sells are administered by physicians. Use of these will therefore decline as a result of social-distancing measures, with Merck also noting that appointments for routine vaccinations have and will continue to be delayed.

Pharma at large is broadly predicting a return to relative normal access for hospital drugs in the second half of the year, with a number of companies indicating that they do not expect a second, more intense, wave of infections to emerge later in 2020. By comparison, Merck has more cautiously suggested that patient access to its products will improve only by the fourth quarter. In a note to investors, Evercore ISI analyst Umer Raffat argued this view is likely over-conservative, particularly as Keytruda has demonstrated survival benefit across multiple types of cancer.

At the very least, however, perception among investors that Merck would be well advised to diversify its portfolio – potentially through M&A – to reduce its dependency on Keytruda will likely increase. Onus on the company to do so could intensify further if Roche’s anti-TIGIT antibody tiragolumab emerges as a viable competitor to Keytruda. Roche has recently scaled up its late-stage programme for tiragolumab, but in contrast Merck would not be drawn on expectations for its own TIGIT-targeting antibody during Tuesday’s Q1 earnings call.

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