Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Merck's drugs may work well for patients, but it needs better medicine to heal itself.

Merck, struggling to return to revenue growth after years of decline, on Friday reported consensus-beating second-quarter earnings and raised the bottom end of its full-year earnings forecast. Its $9.84 billion in revenue beat consensus, too. That's good news for the short term, but the drugmaker's long-run health still depends too much on a roster of new drugs that are starting at a competitive disadvantage.

Merck's modest beat of analyst EPS expectations and 2016 forecast raise only provoked a modest market reaction.
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And Merck needs its new drugs to perform because its older drugs are already losing ground to competition. Sales of the blockbuster arthritis drug Remicade -- some of which Merck splits with Johnson & Johnson -- peaked at $2.7 billion in 2010. Competition from biosimilar versions, which started in earnest in 2015, cut sales to $1.8 billion last year. Remicade sales fell 25 percent in the latest quarter from a year ago, and Merck expects competition to become even fiercer. Cholesterol drugs Zetia ($2.5 billion in sales last year) and Vytorin ($1.6 billion), meanwhile, are going off-patent soon. 

Merck's new products are promising, but some of the most important of them seem to have growth ceilings. 

Hepatitis C drug Zepatier was late to a competitive market led by AbbVie and Gilead. It managed $115 million in sales in the latest quarter, and sales are likely to improve with a European approval and more market access in the U.S. But Zepatier is getting a small piece of an inevitably shrinking pie. Such drugs are cures, and the sickest patients have already been treated. Gilead has the broadest set of drugs that can treat the most patients and has shown it's willing to get serious about price competition.

Merck is arriving late to a shrinking Hepatitis C market.
Source: Bloomberg

Merck's cancer drug Keytruda -- one of a new group of medicines that boost the immune system to take out tumors -- is its most exciting opportunity. But it's been absolutely dominated by Bristol-Myers Squibb's own entry, Opdivo. Merck's drug requires doctors test patients to identify suitable candidates. Bristol's drug can be prescribed without that step and reaches more patients, giving it a major advantage. Opdivo's $840 million in sales in the second quarter more than doubled Keytruda's $314 million. A potential expansion to newly diagnosed lung cancer patients or combinations with other drugs should boost sales, but even more competition from Roche, AstraZeneca, and Pfizer is en route.  

Crossing Pattern
Bristol Myers' Opdivo has thrashed Merck's similar medicine, and it has not been particularly close.
Source: Bloomberg

Sales of Merck's biggest drugs, the diabetes treatments Januvia and Janumet, grew about 2 percent in the quarter and beat analyst expectations. But Eli Lilly's competing Jardiance reduced the risk of death from cardiac events in a clinical trial, something Merck has failed to prove for its drugs. If the FDA lets Lilly make that claim publicly, then it will have a huge marketing advantage. 

Merck said on its earnings call Friday that M&A is a priority -- like seemingly every other large cap pharma or biotech -- but its recent deals have not been game-changers. Its most recent deals were the relatively modest $500 million purchase of chronic-cough drugmaker Afferent and a $400 million deal for a Brazilian animal-health company. The company also recently cut loose some of its staff devoted to early stage drug discovery.

This may not be enough to get the top line growing again any time soon. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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