Merck’s Solid Quarter Doesn’t Soothe Seagen M&A Watchers
No Deal Was Announced, To The Chagrin Of Investors
Executive Summary
Keytruda- and Gardasil-driven revenue growth exceeded forecasts and Merck expects to keep the PD-1 blockbuster cash coming with earlier-stage indications and a potential subcutaneous formulation.
Expectations were high that Merck & Co., Inc. would confirm recent rumors and announce alongside its second quarter earnings report on 28 July that it is purchasing Seagen Inc. Hopes were dashed, however, when no acquisition was revealed and as a result Merck’s stock price closed slightly lower despite the company’s strong Q2 performance.
Merck reported $14.6bn in second quarter sales, up 28% from the same period in 2021 and beating analyst consensus of $13.9bn for the quarter; sales were 18% higher when excluding $1.2bn from COVID-19 antiviral Lagevrio (molnupiravir). Sales of Keytruda (pembrolizumab), the top-selling PD-1 inhibitor on the market, rose 26% year-over-year to $5.3bn – and as the company’s biggest blockbuster by a wide margin it demonstrates Merck’s need to diversify, either from internal or acquired assets.
With Merck and antibody-drug conjugate (ADC) pioneer Seagen both reporting second quarter earnings on 28 July, there was speculation that they would simultaneously announce a deal so that they could discuss the transaction with deal-hungry investors and analysts during their Q2 calls. (Also see "Pharma Q2 Preview: Demonstrating Resiliency Against A Turbulent Backdrop" - Scrip, 15 Jul, 2022.) Momentum continued to build around the theory that the two would reveal a transaction on 26 July when Seagen and its partner Astellas Pharma Inc. reported positive Phase Ib/II results for Padcev (enfortumab vedotin) in combination with Keytruda in first-line unresectable locally advanced or metastatic urothelial cancer.
In the end, the closest that Merck came to discussing a potential Seagen deal was when Guggenheim Securities analyst Seamus Fernandez asked during the earnings call whether any pending acquisitions would be all-cash or involve a combination of cash and equity.
“Obviously, business development remains a priority for us,” president and CEO Robert Davis responded. “And, importantly, we look to add whatever we can find – the best science and innovation that enhance the pipeline and drive long-term growth and value for shareholders. I don't want to speculate on specific future transactions or the specific combination of cash or equity we would use because it really would be fact-specific to the deal at hand.”
Davis went on to note that, more broadly, “we have the capital and the balance sheet strength to go after anything that we feel is strategically important, that brings that scientific innovation that I mentioned that will allow us to continue to augment what we have in our own internal pipeline. So we have the capacity and the flexibility to structure it how we see best to optimize the business. How you do that between cash, debt and equity is really deal-specific.”
Merck Research Laboratories president Dean Li responded to a question about the possibility of extending the patent life of Keytruda beyond 2028, either through a subcutaneous version or some other new formulation. The question-asker, Morgan Stanley analyst Terence Flynn, also wanted to know if it would be possible to co-formulate Keytruda with an ADC in a single molecule.
That kind of co-formulation is unlikely, Li noted, because of the weight of such a molecule. However, Merck is developing a subcutaneous formulation of Keytruda with a registrational Phase III non-small cell lung cancer (NSCLC) trial under way. He said the subcutaneous anti-PD-1 antibody formulation is “novel, useful and non-obvious,” hinting that Merck would be able to obtain patent protection for the injection that would extend beyond the life of current Keytruda patents.
“Especially as we go into early stages of cancer, there will be demand by the patients and the providers to really come up with other formulations besides intravenous formulations where you have to go to an infusion center,” Li added.
Keytruda Grows As Adoption Increases In Earlier Settings
Keytruda is the dominant PD-1 inhibitor across many indications and Merck is bringing the drug forward into earlier lines of cancer treatment, including the adjuvant and neoadjuvant setting, which contributed to the product’s sales growth in the second quarter.
“In the US, Keytruda continues to demonstrate momentum in metastatic indications and is experiencing strong growth from recent launches in early-stage cancers, including triple-negative breast, renal cell carcinoma and melanoma,” chief financial officer Caroline Litchfield said during the call. “Keytruda is now approved for six indications in earlier-stage cancers. We are seeing strong utilizations and are confident in its continued success as physician and patient experience grows.”
Litchfield noted that Merck has seen particularly strong uptake in neoadjuvant, high-risk, early-stage, triple-negative breast cancer based on results from the Phase III KEYNOTE-522 clinical trial, which supported US Food and Drug Administration approval for the indication last year.
“In the metastatic setting, Keytruda maintains its leadership position in non-small cell lung cancer, capturing eight out of 10 eligible mutations,” she said. “Outside the US, Keytruda growth was driven by continued uptake in non-small cell lung cancer and the ongoing launches in head and neck cancer and renal cell carcinoma. Initial indicators also point to encouraging trends in the earliest-stage indications, including triple-negative breast cancer and renal cell carcinoma in key European markets.”
In the US, the FDA accepted Merck’s supplemental biologic license application seeking approval for Keytruda as an adjuvant treatment for NSCLC following surgical resection based on results from the ongoing Phase III KEYNOTE-091 trial. But while the agency set a 29 January 2023 action date, Yi warned that “further data may be provided during the review process that may delay this date.”
He later clarified that the FDA has not made a formal request for more information, but because the KEYNOTE-091 is an ongoing study “we could see a situation where evolving data is asked for.”
Merck reported results from the Phase III trial in March, which showed a statistically significant impact on disease-free survival versus placebo in all comers, but not in NSCLC patients whose tumors had high levels of PD-L1 expression. (Also see "Merck Jumps Into Lucrative Adjuvant NSCLC Space With Keytruda Data" - Scrip, 18 Mar, 2022.) Li noted that KEYNOTE-091 is a dual primary endpoint trial, which means that success on one of the endpoints translates to a successful trial, whereas a study with co-primary endpoints must succeed on both endpoints to be considered positive.
Vaccine Business Also A Big Growth Driver
Beyond Keytruda and Merck’s oncology portfolio, the company’s vaccine business also was an important contributor to second quarter growth, including the anti-HPV product Gardasil (human papillomavirus 9-valent vaccine, recombinant), for which sales shot up 36% to $1.7bn. Sales of its ProQuad, M-M-R II and Varivax vaccines also jumped 12% to a combined $578m in Q2 as more parents took their children to well-child pediatrician appointments in greater numbers than earlier in the pandemic. (See below for more product sales details.)
Litchfield cautioned, however, that revenue will decline through the rest of the year for the company’s pneumococcal vaccine Pneumovax 23 due to competition from newer products, including Merck’s own 15-valent Vaxneuvance and Pfizer Inc.’s Prevnar 20. (Also see "Pneumococcal Vaccines Market Snapshot: Pfizer And Merck Face Off" - Scrip, 15 Nov, 2021.) Merck’s next pneumococcal vaccine V116 recently entered Phase III development.
Even so, Litchfield said the company raised its guidance for full-year 2022 sales to $57.5bn-$58.5bn from previous guidance of $56.9bn-$58.1bn, based on the underlying strength of its business. “Our increased revenue guidance range represents growth of 18% to 20%, or 13% to 14% excluding Lagevrio and the impact from foreign exchange,” she said. Lagevrio is expected to generate $5bn-$5.5bn in 2022 sales.
Analysts described Merck’s Q2 earnings positively in same-day notes, with Guggenheim’s Fernandez calling the numbers “strong” and Evercore ISI’s Umer Raffat noting that the financials were “good.”
Mizuho Securities analyst Mara Goldstein said “sales growth continued the positive Covid-19 recovery trend” even after factoring in a negative impact from foreign currency exchange rates.
Merck closed down 1.4% at $89.94 on 28 July despite its positive earnings report.