Merck to Join Rivals on Immune Cancer Drug Development

Merck & Co., the second-biggest U.S. drugmaker by sales, will work with three other drugmakers to find the most-promising combination treatments for its top pipeline prospect, an immune system-based cancer medicine.

The collaboration boosted Merck’s shares after the company reported fourth-quarter earnings that fell short of estimates. Earnings excluding certain items were 88 cents a share, 1 cent below the average of 15 analysts’ estimates compiled by Bloomberg. The Whitehouse, New Jersey-based company also forecast 2014 profit of $3.35 a share to $3.53 a share, compared with $3.48 projected by analysts.

Merck plans to work with Pfizer Inc., Amgen Inc. and Incyte Corp. on a combination therapy for its top prospect, MK-3475. The drug is one of a new class of experimental treatments called PD-1 inhibitors that use the body’s own immune system to attack and kill tumors.

“Merck seems to now ‘get’ that the PD-1 cancer race is hyper-hyper-hyper competitive,” said Mark Schoenebaum, an analyst with ISI Group LLC, in a note to clients today.

Merck rose less than 1 percent to $53.53 at the close in New York. The company has gained 29 percent in the past 12 months.

The trials with other drugmakers will look at whether addition of a second medicine can boost effectiveness of MK-3475. The company already has said it will seek early regulatory approval for MK-3475, an experimental treatment for skin and lung cancer. Amgen, Pfizer and Incyte have immune-based therapies that use different mechanisms and by combining its drug with them Merck hopes to get a better result.

FDA Filing

The company plans to file a rolling submission for approval to the U.S. Food and Drug Administration by the first half of this year, Merck Chief Executive Officer Ken Frazier said on a call with analysts today. Merck also plans to study MK-3475 in 20 varieties of tumors in patients to determine whether it might work against other cancers, he said.

Merck also has been considering the fate of two non-drug units, following an industry trend of divestiture. Under new science head Roger Perlmutter, the company overhauled its research and development programs, shuttering some efforts and putting weight into vaccines, cancer, diabetes and hospital care.

“Following a string of pipeline setbacks and the lowering of 2013 guidance twice since the start of the year, a ’crisis in confidence’ began to build toward management,” Timothy Anderson, an analyst with Sanford C. Bernstein & Co. who has a market-perform rating on the stock, said in a Jan. 23 note to clients. “Pipeline execution will be critical to the story.”

Unit Decision

As it pushes ahead with new pipeline drugs, Merck may get rid of non-core units. The company may sell or split off the animal health and consumer health lines, a decision it will make by the year’s end, Frazier has said.

The drugmaker is considering “all options” for the units, he said on the analyst call.

“We have always viewed this as a very good business for Merck,” Frazier said about the animal health unit. “The question is what are the alternatives and is there something that makes that more valuable to our shareholders in the longer term.”

In addition to restructuring R&D, the company announced the firing of 8,500 employees in October. The firings were a second round of job cuts that will reduce company’s workforce by 20 percent.

Fourth-Quarter Sales

Fourth-quarter sales fell 3.6 percent to $11.3 billion from a year earlier. Analysts had estimated $11.4 billion. For 2014, Merck projected full-year sales of $42.4 billion to $43.2 billion. Net income was $781 million, or 26 cents a share, down from $908 million, or 30 cents, a year earlier.

To buttress sales, Merck has put more resources behind Januvia, which last year fell short of analyst expectations. Revenue from the diabetes pill fell 1 percent to $1.12 billion from a year earlier.

With Janumet, a pill combining Januvia with metformin, total diabetes sales grew 2 percent to $1.6 billion. Revenue was also hurt by foreign exchange rates, which cut 4 percentage points from diabetes and 3 percent overall. The decline in U.S. sales has stabilized, the company said.

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