Source: Smith Collection/Gado/Archive Photos

This Drugmaker Needs to Show It’s Not a One-Hit Wonder

  • Drugmaker must show it can take drugs from lab to patient
  • “Our track record in R&D was not great for a few years”

Merck KGaA broke free from a decade of failures this year with a new drug in the hottest area of oncology. The next 12 months will begin to show whether it was more than just a lucky break. 

Success could reshape the view of a drugmaker eclipsed by rivals including its larger U.S. offspring Merck & Co. after its labs yielded only one major new medicine in more than 12 years. The turnaround so far rests mainly on Bavencio, a drug launched with Pfizer Inc. this year that’s given the German company an unexpected seat at the table in the $35 billion market for revolutionary cancer treatments that harness the immune system. 

Merck must now overcome investors’ skepticism and prove that it can develop other medicines without a partner to hold its hand. The drug and chemicals conglomerate will start lifting the veil on the rest of its pipeline this month, when it presents initial results for one of its most hyped cancer compounds.

“Our track record in R&D was not great for a few years,” research and development chief Luciano Rossetti said in an interview. “It’s very natural that some will still want to see more validation that we can make responsible choices.”

Rossetti, whom Merck lured away from its U.S. namesake in 2014, says the most important benchmark ahead will be whether the German company can convert its science into regulatory approvals (the key to getting a medicine from the lab onto pharmacy shelves).

High Targets

The company predicts drugs from its labs can generate 2 billion euros ($2.4 billion) in revenue in 2022. Analysts expect half as much, even with help from Bavencio, one in only a handful of medicines that can unmask cancers by removing the tools malignant cells use to evade the immune system. The race for these so-called immune therapies, led by the other Merck, is luring numerous players to an unripe yet fiercely contested market.

Bavencio has yet to prove itself against the most common cancers, with results due next year from four final-stage trials in lung, gastric, ovarian and kidney tumors.

Meanwhile the smaller Merck’s stock has languished, in part because of problems in a separate business that houses liquid crystals used for television displays.

The shares have dropped about 7 percent so far this year, making it one of the three worst performers in the Bloomberg index that tracks the performance of 20 European pharma companies.

When it comes to drug development, “there is a certain skepticism surrounding Merck,” said Ulrich Huwald, an analyst with Warburg Research GmbH in Hamburg.

Unlock Cash

The company is stepping up efforts to get past that perception. Merck is poised to spend a larger portion of health-care revenue on research next year than any European drugmaker aside from the U.K.’s AstraZeneca Plc, according to David Evans, an analyst at Kepler Chevreux.

The German company estimates its research and development costs will rise by as much as 200 million euros this year, setting a record. Next year’s spending will probably be even higher, Chief Financial Officer Marcus Kuhnert said in September. 

To unlock cash and sharpen its focus, Merck is considering the sale of all or part of its consumer health division, which markets vitamins and nutritional supplements.

The goal for the pharmaceutical division now is to get a drug cleared in a large market each year, according to Rossetti.

‘Huge Step’

That focus is starting to bear fruit: the drugmaker won European approval this year on its own for Mavenclad, also known as cladribine, a multiple sclerosis pill resurrected after regulators rejected it in 2011.

“For Merck it’s a huge step forward, but I wouldn’t go so far as to put them on a level with Roche or other truly innovative companies,” said Markus Manns, who helps oversee about 310 billion euros in assets at Union Investment GmbH in Frankfurt, including Merck shares. “They need to build a longer track record.”

At an investor meeting two years ago, Chief Executive Officer Stefan Oschmann -- then CEO-elect -- admitted to the family-controlled company’s history of problems with drug development and argued that things were changing.

Merck is committed to looking for partners for assets it can’t push forward on its own, according to Rossetti. That includes a compound designed to treat multiple sclerosis that should have mid-stage trial results next year, he said.

Some in the industry are starting to pay attention to the company’s pipeline. In an interview in September, AstraZeneca Chief Executive Officer Pascal Soriot pointed to Merck as the U.K. drugmaker’s main competitor in a new oncology field called DNA damage repair. Immune treatments and DNA damage repair are “the king and queen in oncology,” he said.

Merck started a six-year program to boost efficiency and streamline the organization in 2012, the year after Oschmann took his initial job as chief of the drugs unit. The program was called Fit for 2018, the year the company turns 350 years old.

“Surprisingly enough,” said Rossetti, “the very old Merck now is on the map.”

— With assistance by John Lauerman

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