All Systems Go at Merck & Co and Schering-Plough in Forecast-Beating H1 Results

Schering-Plough and Merck: Sharing Wealth and Perks

U.S. Big Pharma firms Merck & Co and Schering-Plough yesterday presented their quarterly results simultaneously, reflecting the prominent position that their cholesterol joint venture (JV) holds within their respective operational performances.

Merck provided a particularly strong package in the second quarter, recording above-expectation sales growth of 6%, to US$5.8 billion. Despite the entry of generic competition to cholesterol blockbuster Zocor (simvastatin) in the United States, domestic sales grew by 17% to US$3.5 billion, while foreign performance was hit primarily by a collapse in Zocor and Fosamax (alendronate; osteoporosis) sales. As the company scaled up preparations for the launch of cervical cancer vaccine Gardasil (human papillomavirus) and spent US$480 million on biotechs GlycoFi and Abmaxis, the quarterly cost base increased significantly; the GlycoFi acquisition included a research expense of US$296.3 million for this quarter. As a result, operating income decreased by 11.8% on a quarterly basis, although if the GlycoFi factor is removed, adjusted operating income would increase by 6.6% year-on-year (y/y) to US$1.7 billion.

Meanwhile, Schering-Plough sent out all the right signals again, as it reaches the two-thirds mark in the turnaround agenda implemented by CEO Fred Hassan. There are few indicators that do not tell a good story, with sales increasing by 14% y/y in the United States and 10% overseas, leading to overall 11% y/y growth to US$2.8 billion. On a year-to-date (YTD) basis, sales have increased by 10% y/y to US$5.4 billion. Schering-Plough continues to invest aggressively in its cost base, and has opened a major new Latin American subsidiary in Brazil; cost of sales, sales, general and administrative (SGA) spending and R&D expenditure all increased at a double-digit rate for the quarter. This led to a slump in operating income on a quarterly basis, but YTD operating income has increased by 16.4% to US$142 million, although margins remain among the smallest in the industry, as Schering-Plough has only just returned to the black.

The two companies' sales were heavily driven by their Zetia (ezetimibe) and Vytorin (simvastatin/ezetimibe) franchise. Zetia sales grew by 50% y/y during the second quarter, and by 37% during the first half, and the continuation of these growth rates would enable it to reach half-yearly blockbuster status in 2007. Vytorin has entirely shrugged off market uncertainty, and has again proved itself to be in a stronger position than statins to absorb the impact of generic simvastatin, due to clearer clinical differentiation. Vytorin sales increased by 143% y/y for the quarter to US$491 million, pushing up the global JV cholesterol franchise by 86% y/y, to US$965 million. On a YTD basis, the JV has grown by 70% y/y to US$1.8 billion.

Merck & Co’s story also tells of greater-than-expected Zocor sales, which decreased by 14% to US$990 million despite the entry of generic competition, which has gained 63% of the market share for the product. Similarly, sales of urology drug Propecia (finasteride) have not yet been unduly decimated by new generic competition; sales decreased by 3% to US$183 million. In addition to this, sales of asthma drug Singulair (montelukast) were strong, up by 30% in total on the back of near-40% growth in the United States. Elsewhere, Merck’s vaccines franchise grew across the board, providing a telling indicator of things to come.

Schering-Plough, meanwhile, shows stronger growth among its top products, including arthritis drug Remicade (infliximab; up 31% to US$307 million), allergy drug Nasonex (mometasone furoate; up 21% to US$242 million) and hepatitis drug PEG-Intron (peginterferon; up 25% to US$226 million). This provides a solid base for Schering-Plough's performance, and the company is no longer held down by a long tail of drugs; the acquisition of U.S. rights to Bayer (Germany) products is bringing some–albeit modest–growth here. Equity income from the JV with Merck stood at US$355 million, significantly above market expectations, although during the conference call, management noted modest stocking for Zetia and Vytorin in the second quarter.

Outlook and Implications

Vioxx and All That

Significantly, both Schering-Plough (up 22%) and Merck (up 24%) invested heavily in research expenditure during the second quarter; as a percentage of sales, R&D stood at 19% and 20% respectively–unusually high for Big Pharma companies. This reflects movement into the biotech field, via the purchase of GlycoFi and Abmaxis by Merck and the licensing of Phase III Remicade follow-up golimumab by Schering-Plough. Merck clearly has stronger potential in its pipeline, and its vaccines business has cleared all significant regulatory hurdles so far; its DPP-IV inhibitor has also speeded to filing status. With an attractive pricing package for Gardasil already in the bag, the near-term outlook for new products looks strong here. In addition, while the significant overhang from Vioxx persists, the outlook here is brightening as well, following the highly unexpected win in the most recent New Jersey case, which involved a long-term user. Management commented during the conference call that two cases in New Jersey that were due to be heard in September have been dismissed; federal courts have already dismissed over 300 cases.

Guidance

As a result of Zocor's strong sales performance, backed up by a competitive pricing strategy, Merck has raised its guidance for the product by US$300 million to US$2.6-2.9 billion. Merck has also raised its full-year earnings-per share forecast.