Merck KGaA: FDA Pauses Evobrutinib Trial Enrollment

Shares in narrow-moat Merck KGaA MRK declined in the midsingle digits on a percentage basis after the announcement that the Food and Drug Administration had paused new patient enrollment on its development-stage drug evobrutinib (for multiple sclerosis) on safety concerns. At first glance, we do not anticipate changing our fair value estimates on this announcement, given the relatively limited impact that this drug candidate will have on this diverse firm’s long-term cash flow generation, especially when considering recently generated cash flows in our model. Shares appear to be falling toward roughly fair valuations at Merck KGaA, in our opinion.

The company announced that two new patients in its Phase III clinical trial of evobrutinib produced laboratory tests indicating possible liver injury. Importantly, these patients did not show any symptoms or require any medical intervention due to the liver function concerns, and liver function appeared to normalize after the patients stopped taking evobrutinib. Because of these safety concerns, though, the FDA has put a hold on new patient enrollment and on patients with less than 70 days in the trial, which is expected to read out later this year. The company is working with the FDA to determine a path forward to ensure that future patients will remain safe while in trial, and we suspect that additional monitoring may be required for new patients.

Overall, we think Merck and the regulatory agency will be able to create a manageable solution that allows the molecule to continue developing toward commercialization. Importantly, though, even if we fully removed evobrutinib from our model, we would not expect to make material changes to our Merck KGaA fair value estimate, especially when taking recent cash flows into consideration.