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What Makes Merck and Array Shareholders Edgy

Prohost Biotech - Wednesday, May 03, 2017

MERCK

Merck (MRK) has beaten analysts’ expectations generating $9.4 billion for revenues in the first quarter of 2017. Its GAAP EPS was $0.56 for the first quarter of 2017 and the Non-GAAP EPS $0.88 for the first quarter of 2017. The outperformance occurred in spite of the declining sales of some aging drugs, which is a normal recurrent phenomenon especially with the increase in break-through competing drugs. Merck’s checkpoint inhibitor immunotherapy Keytruda gene-rated enough revenues to compensate for the firm’s old drugs’ sales sluggishness.

Indeed, Keytruda continued to outperform. The immunotherapy drugs such as Keytruda, which belongs to Merck and Obdivo (nivumab), which belongs to Bristol-Myers (BMY) are created to treat a multitude of cancers, not one cancer. In case any of the malignant tumors resist these drugs, the firms would try various combinations until one of them hits the cancers hard and get approval sooner than usual.

Several supplemental Biologics License Application (sBLA) for Keytruda’s new indications have been approved by the FDA and overseas regulatory agencies.   

The FDA approved Keytruda for the following:  

Refractory classical Hodgkin lymphoma (cHL)

Refractory classical Hodgkin lymphoma cHL, which relapsed after three or more prior lines of therapy.

The FDA accepted and granted Priority Review to Keytruda for :  

The sBLA first line treatment of locally advanced or metastatic urothelial cancer in patients who are ineligible for cisplatin-containing therapy.

The sBLA for Keytruda in combination with pemetrexed and carboplatin for the treatment of patients with metastatic or advanced NSCLC regardless of PD-L1 expression. This application is the first for Keytuda’s combination treatments that are in clinical trials for the treatment of a variety of cancers.  The FDA granted Priority Review. PDUFA action date of May 10, 2017.

The application for second-line use was also accepted for Priority Review.

The European Commission approved Keytruda for the following:

The first-line treatment of PD-L1- positive non-small cell lung cancer (NSCLC)  

The Committee for Medicinal Products for Human Use of the European Medicines Agency (EMA):  

Recommended approval of Keytruda for adult patients with relapsed or classical refractory Hodgkin’s lymphoma (cHL) who did not benefit from autologous stem cell transplant and brentuximab vedotin (BV).  The PDUFA action date is June 14, 2017.

PRESENTATIONS

Merck presented phase 3 clinical trial evaluating the safety and efficacy of its drug doravirine (MK1439) for HIV infection.  The study met its primary efficacy endpoint.   

Merck presented positive results from a study of letermovir for the prevention of cytomegalo-virus infection in high-risk bone marrow transplant patients.  

Merck presented data from V212 - an inactivated varicella zoster virus vaccine for the prevention of herpes zoster, also known as shingles. The data demonstrated a reduction in the incidence of confirmed HZ cases by an estimated 64 percent in immunocompromised patients.

Prohost Important Observations

Beating analysts’ expectations in Q1 financial results demonstrate the importance of Merck’s immunotherapy checkpoint inhibitor drug Keytruda. Merck’s shareholders are now waiting impatiently for the FDA decision on May 10, 2017, i.e., next Wednesday on whether it approves or rejects the combination of Keytruda’s with chemotherapy for metastatic Non-small-cell-lung-cancer (NSCLC) regardless of PD-L1 expression.

The importance of this FDA decision resides in the fact that in case the the agency approves Keytruda’s combo, its sales revenues will explode.        

Waiting for the FDA decision, Merck’s shareholders seem to be experiencing lack of certainty about the approval. The reason for their skepticism and fear emanates from from the fact that Merck's trial based on which it filed its sNDA was early stage and relatively small. The approval would also rally the stock for a long period, as it would transform Keytruda from a cancer bestseller in a limited market to a bestseller in a huge cancer market that promises generating huge revenues.          

When it comes to drug approval, it is hard, if not impossible to predict what the FDA will decide upon. The only one can succeed in predicting the FDA decision is when the trial results are undeniably highly positive from early trials, when the disease is life threatening and the patients have no other treatments that can lift them from from their misery or save their lives.

If we want to speculate with a prediction based on commonsense rather than on evidence-based science, or opinion will surely be that Keytruda combination will be approved. Our decision stands on several facts, including, the seriousness of the advanced cancer lung that Keytruda is expected to treat, the promising results of the trial regardless of how short or small it was, and the fact that the drug is already approved and is an effective breakthrough checkpoint inhibitor. When it comes to cost saving, eliminating PD-L1 testing would save money for the healthcare system, whose budget is crying misery.                 

Still we cannot claim this reasoning is sufficient to predict what would happen on May 10, 2017, i.e., next week. All we can say is that we are optimistic over Keytruda’s future growth, and are impressed by Merck’s management and its pipeline of investigational products.    

_________

ARRAY BIOPHARMA

NO NEWS emerged from Array’s combination binimetinib/encorafenib for DRAF-mutant advanced melanoma or any other investigational product that could give us a hint about the reason, or reasons for yesterday’s stock steep decline. All we heard is that ARRY’s option $13 Put had a very high implied volatility, which usually suggests an upcoming event that would cause either a big rally or a huge stock selloff in the near future.

As a matter of fact, Array (ARRY) shareholders and many other long and short investors are opening their ears wide so they do not miss news about the fate of Array Phase 3 COLUMBUS part 2 clinical trial with Encorafenib + binimetinib for BRAF-mutant avanced melanoma. This upcoming event is of extreme importance.  In case the approval materializes, Array’s life would change as the firm would move from a development-stage firm into a revenues-generating firm. On the other hand, a failure of the drug, although will not be lethal, yet, it would make investors wait another two years before they see Array’s promising investigational drugs begin to reach and cross the finish line. The colorectal cancer combination is also promising and in case it passes all the clinical trial tests, its will be a tremendous powerful generator of revenues in an extremely large market.     

Bottom line, we don’t know what really caused the stock to decline yesterday. It might be the reason cited above, i.e., shareholders are getting uneasy about the upcoming event, or it could be one of the circumstances that force shareholders to sell their stocks.

We still believe, though, that Array product pipeline is valuable and promising and so are the firm’s technological capability and solid sciences.          

Prohost Forward-Looking Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

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