Health

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.

You'll have to excuse Merck & Co. Inc. investors for being distracted on Tuesday; it's a little hard for them to focus on a somewhat fluky earnings report when the trajectory of a multi-billion-dollar cancer-drug market is about to be decided.

Merck's first-quarter results topped analyst expectations, helped by the government and favorable foreign-exchange rates. But the company's future rests on an FDA decision, expected by May 10, on whether to approve a combination of its lead immune-boosting cancer drug Keytruda and chemotherapy to treat newly diagnosed lung-cancer patients. Keytruda is already approved in a subset of that population, and this approval could make the drug far more broadly available.  

Meh
Markets weren't overly impressed with Merck's first quarter earnings
Source: Bloomberg
Intraday times are displayed in ET.

As Bloomberg News pointed out in its coverage of the company's earnings, Merck's fortunes are more and more tied to Keytruda. Its shares jumped 6 percent in November when it announced the FDA might approve its combo much earlier than expected. A similar stock move up or down is likely coming soon, depending on what happens over the next eight days. 

Nothing else at Merck engenders as much excitement. The latest quarter's results, and a full-year revenue-forecast boost, were driven partly by government purchases of the HPV vaccine Gardasil, which are unlikely to repeat. Sales of Hepatitis C drug Zepatier were better than expected, but its market is in decline.

Sales of Merck's best-selling drugs, the diabetes medicines Januvia and Janumet, fell 5 percent from a year ago and missed analyst expectations by nearly $100 million. Patent expirations, particularly for the heart drugs Zetia and Vytorin, cost Merck nearly $700 million in sales in the quarter, and the company expects to lose even more as the year progresses.

The Key
Keytruda is Merck's primary bastion against a sales decline for many of its biggest drugs. A jump in Gardasil sales came from government stocking
Source: Merck
*Zepatier's launch is so recent that y-o-y comparison is misleading.

Keytruda's opportunity is enormous -- the market for this generation of IO drugs is expected to approach $20 billion by 2020 -- and Merck needs to seize it. Its chemo combo is its best near-term chance to do so. But approval is not certain because Merck's trial was relatively small and early-stage.

Bristol-Myers Squibb Co. won the first round of the IO lung-cancer fight with an aggressive strategy. While Merck restricted Keytruda trials to patients whose tumors expressed a high level of a biomarker (PD-L1) that predicts the drug will be more likely to succeed, Bristol tested Opdivo in a larger group of patients. Doctors are required to test previously treated patients for the biomarker in order to prescribe Keytruda, but have been able to freely recommend Opdivo since 2015.  

But when Bristol tried this same aggressive approach in newly diagnosed lung-cancer patients, it fell flat on its face, with a failed trial in August. Merck's more cautious approach, meanwhile, led to Keytruda becoming the only drug of this type approved in the population in October, albeit only in high PD-L1 patients. 

An early chemo-combo approval would substantially amplify Merck's victory. First, it could broaden Keytruda's use and weaken Bristol's no-testing advantage (Merck included patients regardless of PD-L1 expression in its combo trial). 

Second, the combination is notably more effective than Keytruda alone. And third, an approval will create a formidable competitive barrier to rivals trying to expand IO market share with combos of their own. Bristol and AstraZeneca PLC will release data this year on combinations of two different IO drugs in lung cancer that may have worse side effects relative to Merck's approach. Roche Holding AG is still running a trial for its own chemo combo.

With an approval, Keytruda may surpass Opdivo as the best-selling drug in this class overall as soon as this year. With a rejection or a significant delay, Merck would weaken its chances of dominating the largest market for this group of drugs.

 

Neck and Neck
The race for IO supremacy is still close, but Merck could pull ahead
Source: Bloomberg

Opdivo still generated nearly twice as much revenue as Keytruda in the first quarter because of its earlier and broader approval in previously treated lung-cancer patients. This is Merck's chance to turn the tables, and such opportunities will likely be few and far between. 

AstraZeneca's Imfinzi got its first FDA approval on Monday, bringing the total number of marketed drugs in this class to five. Each drug is involved in a huge variety of studies of potential new uses, and drugmakers are increasingly emulating each others' approaches to combo partners and trial design.

Being the only drug on offer for a group of patients, let alone one as large as the population of newly diagnosed lung-cancer patients, will become an increasingly rare experience. This is probably Merck's best shot to fully enjoy it.  

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

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net