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Merck & Co. looks to China amid continued US pricing pressure

Merck & Co. Inc. is relying on China and other markets outside the U.S. to offset increasing pricing pressure at home as U.S. President Donald Trump calls for the pharma industry to bring down drug costs.

"Outside the U.S., there's opportunity in new geographies, and China is an exemplar of that," Adam Schechter, executive vice president and president of global human health, told analysts at the company's July 27 second-quarter earnings call.

The Kenilworth, N.J.-based company recently pledged not to raise the average net price of its drugs by more than inflation annually in response to the president's criticism. The decision comes as Pfizer Inc. rolls back price hikes for as many as 100 of its products, while other major pharma companies including Novartis AG have halted drug price increases.

Merck also plans to slash by 60% the price of its hepatitis C drug Zepatier, which generated $113 million in sales in the second quarter, along with a 10% reduction in the prices of several other therapies.

Keytruda remains top priority

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Blockbuster immunotherapy Keytruda, also known as pembrolizumab, raked in sales of $1.67 billion during the second quarter, nearly double the $881 million in sales in the year-ago period. Keytruda, which is approved in 12 indications across eight tumor types in the U.S. including lung cancer, works by blocking the PD-1 protein on immune cells from linking up with the PD-L1 protein on cancer cells and has generally been limited to patients with high levels of the PD-L1 marker. The drug has a rough market share of between 60% and 65% for lung cancer in the U.S., according to Schechter.

"Keytruda is becoming foundational for the treatment of cancer, and add in Lynparza and Lenvima as well as our other oncology assets in the pipeline, and we believe that Merck's oncology portfolio has the breadth and depth to further expand our leadership position," said Merck Chairman and CEO Kenneth Frazier.

The company announced July 26 that Keytruda was authorized by the China National Drug Administration for adult patients with skin cancer, marking the first time that an anti-PD-1 therapy has been approved for advanced melanoma in China. More than 40% of Keytruda sales came from outside of the U.S. While the drug is currently only delivered on its own in those markets, Frazier said a combination therapy with other drugs will represent an additional opportunity in regions beyond the U.S.

Animal health a 'key pillar'

Merck also reiterated a commitment to its animal health division, calling the business a "key pillar" that provides diversification from Keytruda and the company's human health portfolio. The animal health unit booked a 14% year-over-year increase in second-quarter sales to $1.09 billion.

The company has faced pressure to divest its animal health business, especially on the heels of Eli Lilly and Co.'s July 24 announcement that it will spin off its Elanco Animal Health unit through an IPO in order to focus on the human pharmaceutical business.

Frazier said Merck will continue with its current structure, which he described as beneficial.

"Our animal health business is growing more quickly than its industry peers, and a great deal of that has to do with the fact that we're able to achieve synergies between our animal health R&D and our human health R&D," Frazier said.

Merck's second-quarter non-GAAP net income was $2.85 billion, or $1.06 per share, up from $2.78 billion, or $1.01 per share, a year earlier. The S&P Capital IQ normalized EPS consensus estimate for the second quarter was $1.03.

The company will also "continue to scour the landscape carefully" for M&A opportunities, Frazier said, noting "a dearth of M&A across the industry recently" as ample access to capital, including through IPOs, reduces deal appetite in the biotechnology sector.

Merck's shares closed 0.81% lower at $63.49 on July 27.