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Merck's 2020 outlook clouded by COVID-19 impact on vaccine, oncology sales

The impact of the COVID-19 pandemic was "immaterial" to Merck & Co. Inc.'s bottom line in the first quarter due to a balance of higher demand for drugs, lower operational costs and the beginning of a downturn in patient volume, according to CFO Robert Davis.

Still, Merck's revenues grew 11% year over year to $12.1 billion in the first quarter, led by the company's blockbuster immunotherapy cancer treatment Keytruda, which rose 46% from the same quarter a year ago to $3.3 billion in sales.

"We are now seeing that COVID-19 will impact near-term results due mostly to patient access challenges," Davis said on the company's April 28 earnings call. "In this environment, our strong financial position and conservatively positioned balance sheet is allowing us to maintain strong liquidity and very healthy access to the capital markets and our capital allocation priorities remain largely uninterrupted."

Merck expects the biggest impact from the pandemic — including global measures to minimize infection rates — to be felt in the second quarter, with recovery beginning in the third quarter and then normalized in the final three months of the year, Davis said.

The anticipated second-quarter impact led executives to lower Merck's full-year guidance midpoint by $2.5 billion. Chief Commercial Officer Frank Clyburn said on the call that a reduction in physician visits — 70% lower than pre-COVID-19 levels, he estimated — would play the biggest role in these losses.

"To better understand the impact to Merck, it is important to highlight that our portfolio is heavily weighted towards products administered by a physician," Clyburn said.

Merck executives expect a substantial decline in vaccine sales in the second quarter, following the American Academy of Pediatrics and the U.S. Centers for Disease Control and Prevention's recommendation not to prioritize immunizing children over the age of two. Merck's adult and adolescent vaccines like Pneumovax and Gardasil are also likely to decline due to reduced patient visits during the pandemic.

Even oncology sales, a staple for Merck and an area that is not often susceptible to market changes, is likely to decline as patients are prioritized based on the severity of their cancer or specific tumor types, and delays in the start of therapy might occur, Clyburn said.

Women's health — part of a spinoff Merck expects to complete in the first half of next year — is also likely to suffer as fertility medicines and physician-administered implants are underutilized, Clyburn said.

The company's animal health arm is likely to drag as well, with a slower recovery than the other impacted units.

"A heavy focus on provider-administered drugs like Keytruda, vaccines and hospital products increases Merck’s exposure to the global coronavirus pandemic because of fewer patient visits to healthcare sites," said Moody's Senior Vice President and Pharmaceutical Analyst Michael Levesque in an April 28 note. "This will flatten Merck’s growth in 2020, but its credit profile will remain very strong. ... In addition, strong underlying demand for Merck’s products will lead to a sales rebound in 2021 as the pandemic eventually ebbs."

Clyburn said the recovery in the fourth quarter is based on the company's experience in China, which dealt with the outbreak earlier in 2020 and has embarked on the path already.

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Merck CEO Ken Frazier

Source: Merck

The new guidance is realistic under the circumstances and conveys optimism for the future, Merck CEO Ken Frazier said.

"Our near-term guidance takes into consideration what's really happening in the outside world and is an attempt to be realistic about physicians and their ability to access patients," Frazier said. "But in final analysis, we believe that our underlying business fundamentals are very sound going forward."

Long road to a vaccine

President of Merck Research Laboratories Roger Perlmutter said on the call that the company has been working to characterize effective immune responses to the coronavirus and has partnered with government and nonprofit institutions to collect patient data.

Perlmutter reiterated the historic difficulty of developing a new vaccine, noting that there have been only seven vaccines directed against previously unaddressed human pathogens that earned registration four of which were developed by Merck.

"With the COVID-19 pandemic, however, we are tasked with creating a completely new vaccine in one-tenth the time we devoted to [Ebola vaccine] Ervebo, and we must plan to manufacture this vaccine at 1,000 times the scale," Perlmutter said. "Based on the progress we have made, I will say I am optimistic that a vaccine capable of inducing a potent neutralizing immune response to SARS-CoV-2 can be invented."

Without delving into detailed programs, Perlmutter said the company would be using older vaccine platforms to approach the new coronavirus.

"Since we believe that virtually everyone is susceptible, these are all high bars, and that makes us want to return to proven platforms that have these kinds of characteristics," Perlmutter said. "My expectation is that, over time, we will need more than one vaccine in order to actually protect the human population from SARS-CoV-2."