Merck Sees Strong Cholesterol Market In ‘04; Zocor Growth, Profit From Zetia

Merck expects Zocor sales to remain in the $5 bil. range in 2004 despite generic erosion overseas and the introduction of new competitors in the cholesterol class.

During a Dec. 3 earnings guidance call, Merck said it is projecting Zocor (simvastatin) sales of $4.9 bil.-$5.1 bil. in 2004, essentially flat with the expected 2003 range of $4.9 bil.-$5.2 bil. Zocor will turn in that performance despite having lost patent protection in all major markets except the U.S., France and Italy.

"What's driving our forecast around Zocor in the U.S. is the improved growth rate that we've seen for the class, and the fact that Zocor's growth rate - since the low point around May or so - has continued to increase at a faster rate than the other products in the market," Senior Director-Investor Relations Mark Stejbach said.

In addition, the launch of AstraZeneca's Crestor (rosuvastatin) "seems to be disproportionally less" of a factor for Zocor "than it is on some of the other products."

Merck is also predicting that its joint venture with Schering-Plough to market the cholesterol absorption inhibitor agent Zetia (ezetimibe) will begin to generate income in 2004.

Merck and Schering launched Zetia at the beginning of the year; ezetimibe has generated over $300 mil. year-to-date. Merck expects the cost of the joint venture to exceed its share of revenues during 2003 (¹ (Also see "Merck/Schering Zetia Early Use Is In High-Risk Patients; New Rx Share At 5%" - Pink Sheet, 3 Nov, 2003.), p. 23).

For 2004, Merck is projecting that the net impact from the joint venture will be "positive," despite continued heavy spending to support Zetia and the projected launch of a Zetia/Zocor combination product.

"This reflects sales of Zetia and the Zetia/Zocor combination product, more than offsetting the launch costs of this new product and, of course, the continued support of Zetia in ongoing trials," Stejbach said.

Merck noted that income from the joint venture will fluctuate during 2004.

For the first half of the year, the JV income will reflect "continued growth of Zetia," Stejbach noted. In the second, there will be a "step-up in expenses of the launch...and then of course, we'll have sales for the combination product."

Merck acknowledged that the launch of the combination product could have an impact on Zocor's performance late in the year, but the company does not expect significant cannibalization in 2004.

"Any impact from the combination product being launched is really an impact towards the end of the year," Stejbach said. "We would expect that impact on Zocor to be less than the impact on everybody else in the class."

Beginning in 2005, Merck will presumably be more aggressive about shifting patients away from Zocor to the new product; Zocor loses patent protection in the U.S. in 2006.

Merck held the conference call in advance of its Dec. 9 analysts conference. The company is forecasting 7% earnings per share growth in 2004, over its recently downgraded projections for 2003.

However, after the earnings downgrade for 2003 and some high profile R&D setbacks, the projection of a return to growth in 2004 was greeted as good news by investors.

Merck did not present any initial impressions of the impact of the Medicare legislation on its earnings. However, the company can be expected to address that theme during the investor day.

Merck is projecting that the osteoporosis agent Fosamax will emerge as its second-largest franchise in 2004, with sales of at least $3 bil., up from a projected $2.6 bil.-$2.8 bil. in 2003.

The Cozaar/Hyzaar hypertension family is also projected to move closer to the $3 bil. mark, with sales projected at $2.7 bil.-$2.9 bil., up from $2.5 bil.-$2.7 bil. in 2003.

The Singulair asthma/allergy line is projected to grow to $2.4 bil.-$2.7 bil. in 2004, up from $2 bil.-$2.2 bil. this year.

Finally, Merck is projecting that its COX-2 inhibitor family ( Vioxx and Arcoxia ) will post sales of $2.6 bil. to $2.8 bil. in 2004, roughly even with the $2.5 bil.-$2.7 bil. projected for 2003.

Merck is expecting FDA approval of Arcoxia during 2004. "We're still planning on submitting an expanded NDA for Arcoxia in the U.S. this year," Stejbach said. "We are assuming approval at the end of '04 for Arcoxia in the U.S., but we haven't assumed any substantial U.S. sales based on the timing late in the year."

Merck originally filed an NDA for Arcoxia in 2001 but withdrew the application in light of questions about cardiovascular safety and dosing in acute pain (² (Also see "FDA “Case Studies” On Dosing Problems Include Lotronex, Crestor" - Pink Sheet, 24 Nov, 2003.), p. 24).

Merck is projecting a 15%-20% decline in supply payments from AstraZeneca for Nexium (esomeprazole)and Prilosec (omeprazole). Merck manufacturers Prilosec for AstraZeneca and receives royalties on Nexium sales.

"The shift downward in 2004 reflects primarily lower Prilosec volume" in light of increased generic omeprazole availability. "In addition, we have a lower payment rate on Nexium, 27%, versus 32% on Prilosec," Stejbach noted.

With declining sales of its comparably higher-margin products, including Zocor and Nexium, Merck expects gross margin to be negatively impacted in 2004. The company is predicting gross margins to be 80%-81%, compared to 81.9% year-to-date.

Merck said that the decrease in margins is not related to incentives. "It's product mix driven," Stejbach said. "It's not based on fees or incentives. There never have been, nor with the new distribution program...fees or incentives paid to the trade to encourage them to buy products above their needs."

The company also used the call to reaffirm its previous guidance that it would take a $650 mil.-$750 mil. hit in the fourth quarter from an inventory management program designed to limit forward buying by wholesalers (³ (Also see "Zocor Sales To Take $500 Mil. Hit In 2003 From Merck Inventory Program" - Pink Sheet, 27 Oct, 2003.), p. 23).

Merck announced during the third quarter call that the company had lowered guidance for the remainder of the year and would reduce headcount by 4,400 (⁴ (Also see "Big Pharma’s “Black Wednesday”: Quarterly Reports Underscore Uncertainty" - Pink Sheet, 27 Oct, 2003.), p. 18).

Merck said that it has no plans for further restructuring. "There aren't any current plans for additional restructuring. There's no additional actions anticipated at this time," Stejbach said.