German Merck, flying under Street’s radar, gets no respect; but not for long

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Steve’s Take:

Wall Street analysts are perhaps familiar with the history behind the two Pharma powerhouses, US-based Merck & Co., and Germany-based Merck KgaA. Until recently, however, I only had a dim image that one of the companies begat the other.

Then last month, the German Merck (G-Merck) and its US partner Pfizer were granted priority review status in the US as they seek to widen the use of their immunotherapy drug avelumab to include bladder cancer. The FDA will review trial data for the drug against locally advanced or metastatic urothelial carcinoma (mUC) which has worsened despite chemotherapy, within six months instead of the usual 10.

Here’s where the irony shows up. In the race to develop the next wave of drugs that use the immune system to fight cancer, it’s a very small world.

Avelumab belongs to a new generation of biotech drugs that stop some tumors from hiding from the immune system, similar to US sister Merck’s white-hot star Keytruda, Roche’s Tecentriq and Bristol-Myers’ Opdivo. G-Merck and Pfizer previously got US priority review status for avelumab’s use against a rare and aggressive form of skin cancer called Merkel cell carcinoma, according to Reuters.

Avelumab is crucial to G-Merck’s plans to rejuvenate its healthcare business, currently under pressure while top-selling Rebif (interferon beta-1a)–an injectable treatment for multiple sclerosis–attempts to ward off competition from newer, oral MS medicines.

According to PMLive, analysts have predicted sales of avelumab around $600 million in 2020, assuming approvals later this year, and rising to $4 billion-plus at its peak, despite playing catch-up with rival offerings (calledPD-1/PD-L1 inhibitors) from US Merck, Roche and Bristol-Myers.

To get a glimmer of the stakes for these new “wonder” drugs, US-Merck reported 2016 fourth-quarter sales of Keytruda beat forecasts, rising 125% from the same period last year to $483 million, ahead of the $470 million figure forecasts by analysts. Such numbers have not gone unnoticed by its German sibling.

What else has this low-profile drug developer from the quaint town of Darmstadt been up to recently?

For starters, US-based Vertex Pharmaceuticals decided to jettison whatever oncology assets it still owned and G-Merck was Johan on the spot as the cancer arena clearly is the cornerstone of its R&D revival program. The licensing deal between the two companies seemed a good match with G-Merck coming away with projects targeting areas relevant for its program, and as a bonus they appear to face very little industry competition, according to Seeking Alpha.

The main focus of the Vertex pipeline spinoff is VX-970, an ATR (ataxia telangiectasia and Rad3-related) protein kinase inhibitor on which the company reported initial Phase 1 safety data last year. The main appeal to Merck of this program is likely twofold: it’s an asset with very little industry competition, and DNA damage/repair is a key target of the company’s existing oncology effort where ATR kinase is thought to help cancer cells survive DNA damage.

G-Merck also recently unwrapped its secret weapon. Many immuno-oncology players with a solid partnered PD-L1 targeting candidate already in late-stage development might be swayed to pause and bask in the glory of near-guaranteed spoils. But not G-Merck. The company promptly pivoted to a new project from its own private research lab that it says could even surpass avelumab’s prospects.

Luciano Rossetti, the German group’s head of R&D, said the bispecific fusion protein, known only under the designation M7824, “is the most exciting clinical asset in our pipeline right now,” according to EP Vantage. He reckons that this molecule can beat even the efficacy of avelumab by blocking innate as well as adaptive immunity.

“It’s a completely novel, first-in-in-class, bispecific protein of an avelumab-like antibody…linked to two molecules of TGF-beta trap,” says Rossetti, adding that having yielded “spectacular” early data, M7824 is now on an even faster development pace than avelumab.

In December, G-Merck reported one complete and several partial remissions in what was just a dose-escalation trial. The group is now quickly recruiting patients into a study in over 10 types of tumors. TGF-beta has been likened to a master switch in tumor immunity, and it is theorized to be involved in mediating innate immunity in the tumor microenvironment. G-Merck now needs to prove that incorporating a TGF beta block adds major efficacy to PD-L1 checkpoint blockade.

Sounds to me like the pipeline vault is stocked with what certainly appears to be promising molecules with big-ticket price potential on pharmacy shelves in the not-too-distant future. Presently, however, this is largely speculation.

What do analysts think?

Here’s a rundown on the very latest pronouncements.

G-Merck received a €110.00 ($117.02) price objective from stock analysts at Independent Research GmbH in a recent research note issued to investors. The firm currently has a “neutral” rating on the stock.

Commerzbank AG set a €109.00 ($115.96) price objective and gave the company a “neutral” rating in a research note on Thursday.

Warburg Research set a €110.00 ($117.02) price objective and gave the company a “buy” rating in a research note on Thursday.

Citigroup Inc. set a €116.00 ($123.40) price objective and gave the company a “buy” rating in a research note on Wednesday, March 1st.

DZ Bank AG reaffirmed a “buy” rating in a recent research note.

Finally, BNP Paribas set a €114.00 ($121.28) price objective on and gave the company a “buy” rating in a recent research note.

Twelve investment analysts have rated the stock with a “hold” rating and nine have issued a “buy” rating to the company. The stock presently has a consensus rating of “hold” and a consensus price target of €105.25 ($111.97).

Analysts are failing to grasp just how close to the “Big 3” players in the immunotherapy arena this teutonic contender is. Hold it if you own it and buy it if you don’t, they say. Meanwhile, they are all setting a price target higher than its recent close, despite the uncertainty regarding pharma prices fomenting back in Washington.

G-Merck closed Thursday at €100.63. The stock’s 50 day moving average price is €102.30 and its 200 day moving average price is €97.91. The firm has a market capitalization of €44.24 billion and a price-to-earnings ratio of 29.73. Merck KGaA has a 52-week low of €71.32 and a 52-week high of €103.68.

Rounding out the corporate “personality” of the German firm, Merck was founded in 1668 and is the world’s oldest operating chemical and pharma company. It is also one of the largest pharma companies in its own right, ranking number 24, just behind Biogen and ahead of Mylan, according to Ranking the Brands.

Merck was privately owned until its initial float on the Frankfurt Stock Exchange in 1995. The Merck family still controls a majority (70.3%) of the company’s shares.

US Merck & Co. was established as a subsidiary of G-Merck in 1891, but became an independent company in 1917.

Bottom line:

For now, G-Merck’s top-selling Rebif for MS is holding up remarkably well, with sales slipping just €100 million to €1.7 billion last year, and its resilience helped the company post sales of €6.85 billion, down just 1% on the prior year.

The German company said recently that it expects to see €2 billion in revenue from new launches between 2017 and 2022, with a new product or indication launch each year.

Steve's Take: If your portfolio needs a sleeper European component, consider @MerckGroup Click To Tweet

If your portfolio is lacking a European component and the above discussion has whet your appetite for a sleeper stock, hiding in southern Germany, you can find it on the DAX in Frankfurt under the symbol “MRK,” or on the US OTC under “MKGAF.”

Auf Wiederhören! (Okay, talk to you again soon!)

Avelumab update from FirstWord Pharma

Update: March 9, 2017 – Merck KGaA announced that for the treatment of first-line non-small-cell lung cancer, completion of the JAVELIN Lung 100 trial – which is evaluating the PD-L1 inhibitor avelumab in a monotherapy setting – has shifted from August 2017 to April 2019.

The study has been upsized from 420 to 1095 patients and the primary endpoint has been amended to include both progression free survival and overall survival. Furthermore, both endpoints will be evaluated in “high PD-L1 positive” patients, versus all PDL1+ patients in the previous protocol.