Merck (MRK) has announced that it will take a $2.9 billion charge (or $1.9 billion after taxes) and restate its fourth quarter and full year 2016 earnings (announced on February 3) to write down most of its 2014 purchase of Idenix Pharmaceuticals and its hepatitis C drug candidate.
This isn’t good news for Merck. Before the charge Merck had reported fourth-quarter earnings of 89 cents a share, below Wall Street projections and below the 93 cents a share the company earned in the fourth quarter of 2015. For 2017 the company is now projecting revenue in the range of $38.6 billion to $40.1 billion. That’s essentially flat with 2016 revenue.
But the ripples from the announcement are likely to spread through the drug and biotech sectors. The market for drugs that treat hepatitis C, once one of the drug sector’s most promising opportunities, now looks remarkably rocky. Merck’s write down follows on a surprise from Gilead Sciences (GILD), the leader in the segment, that 2017 sales of its three main hepatitis C drugs would be well below Wall Street forecasts. Sales of the drugs are fading faster than expected, the company said, as the pool of new patients dries up.
Wall Street is divided about what’s going on in the hepatitis C market. A crowded market that include drugs from Abbvie (ABBV), Gilead, and Merck (whose Zepatier was approved by the U.S. Food & Drug Administration in 2014) looks to be driving down prices. And the Merck charge for the drug it was developing from Idenix’s pipeline has raised the possibility that it’s getting harder to beat the performance of existing drugs while avoiding safety issues.
Merck’s news will up the pressure on Gildead to acquire new drug candidates, either through a deal with a biotech company or by acquiring another drug company, to bolster what is now seen as fading growth prospects. Shares of Gilead are down 1.55% for 2017 to date as of the close on February 27 and are lower by 18.47% for the last 12 months. In contrast shares of Merck are up 11.86% in 2017 and 34.23% over the last 12 months. Gilead trades at just 6.66 times trailing 12-month earnings per share versus Merck’s 25.39 multiple.
The spring months–beginning on March 17 with the American College of Cardiology annual conference and stretching into June–are normally hot months for acquisitions (and share prices) as reports of trial results push big drug companies looking for help with their future growth into action. This year I think Gilead, Bristol Myers Squibb (BMY) and Novartis (NVS) are all likely to be on the prowl. That will serve to increase acquisition rumors that already swirl about big biotechs such as Incyte (INCY) and smaller companies such as Acadia Pharmaceuticals (ACAD) and the Medicines Company (MDCO). One company to watch in the hepatitis C space is Achillion Pharmaceuticals (ACHN)
Bristol Myers, Incyte, and Acadia are all members of my Jubak Picks portfolio. I own shares of Inctye, Acadia and the Medicines Company in my personal portfolios.
