Merck (MRK) and Pfizer (PFE) Team Up to Fight Diabetes


Case of diabetes in the United States have risen at a dramatic rate since the 1990s. Higher rates of obesity, increased consumption of processed foods, more sedentary lifestyles, and an aging population have all contributed to the disease, which now affects roughly 25 million Americans. The average annual cost per patient to treat this disease is $9,800 - or $245 billion annually for the country. This means that biotech companies are rushing to find the next blockbuster drug or treatment for diabetes, especially Type 2 diabetes, which accounts for 95% of all cases.

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Type 2 diabetes is usually treated with insulin to stabilize blood sugar levels. These injections are costly and adversely impact patients' lifestyles. To address this issue, several Big Pharma companies are developing orally administered sodium glucose cotransporter (SGLT2) inhibitors. SGLT2 inhibitors help patients excrete more glucose in urine to stabilize their sugar levels, with the goal of reducing the amount of daily insulin injections. To date, only Johnson & Johnson's (JNJ) SGLT2 inhibitor, Invokana, has been approved by the FDA. Similar products from Bristol-Myers Squibb (BMY) and AstraZeneca (AZN) were rejected. Considering the urgent need for SGLT2 inhibitors, Big Pharma heavyweights Merck & Co. (MRK) and Pfizer (PFE) teamed up in April to co-develop their own product, known as ertugliflozin. Ertugliflozin is current ready for Phase III trials, and could be sold as a standalone drug, or used in conjunction with other orally administered drugs, such as metformin and sitablipin. Both metformin and sitablipin are antihyperglemic agents that can be used to decrease higher levels of glucose in the blood. However, sitablipin, which Merck sells under the trade name Januvia, is being investigated by the FDA for possible connections to pancreatic cancer. Januvia generated $4 billion of Merck's top line last year. Merck's new partnership with Pfizer could draw attention away from this investigation, which has cast doubt on the future of Januvia. Merck paid Pfizer $60 million to start the partnership, splitting revenue and costs 60/40, respectively. Sales of SGLT2 inhibitors should be strong once more products reach the market, but investors should beware of the proposed Medicare cuts that could reduce dialysis payments by 9.4% in 2014. That bad news took out dialysis market leaders Fresenius Medical Care (FMS) and DaVita Healthcare Partners (DVA) last week. These proposed cuts haven't addressed diabetes medications directly, but they could, considering the relationship between dialysis and diabetes. Last quarter, Merck's revenue dropped 9% while its earnings slid 8.3% from the prior year. Pfizer's revenue declined 9.3%, but earnings surged 53.3%. Based on Merck and Pfizer's respective 5-year PEG ratios of 4.39 and 4.57, respectively, analysts also don't see much growth ahead for either company. Therefore, it's clear that both companies need a shot in the arm to stay competitive, and SGLT2 inhibitors could do the trick.

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Published on Jul 8, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2016. Content published with author's permission.

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