Keytruda Helps Offset Generic Headwinds for Merck

Generic competition and weakening market positions offset by strong Keytruda gains led to overall flat top-line growth in the fourth quarter, which we expect to continue through 2018. We expect over $5 billion of lost sales (13% of total 2016 sales) to patent expirations over the next five years. Further, increased competitive threats from the SGLT-2 diabetes drugs will likely weigh on Merck’s top drug Januvia. The loss of these well-established drugs will have an amplified impact on the bottom line as these drugs carry high operating margins.

Despite the challenges with older drugs, Merck’s immuno-oncology platform is performing extremely well and is positioned to offset the generic headwinds on other older drugs. Keytruda is poised to take the first-mover advantage in non-small cell lung cancer regardless of PD-L1 status with over a one-year head start. The first-mover advantage is particularly important in cancer, as maturing clinical data and physician acceptance can lock in market share that is hard to displace. The key near-term competitive threat to Merck is Bristol and AstraZeneca’s CTLA4 combination data that is expected as in six to 12 months. However, we expect different patient populations will require different treatments, allowing market share opportunity for all the companies, but Merck’s head start should drive the lion's share of the most important immuno oncology market of NSCLC.

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