Merck’s Cancer Drug ‘Erbitux’ Suffers Another Clinical Trial Failure
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The growth of stocks of even the most venerable market leaders in the pharmaceutical industry is largely dependent on bringing new products to market and obtaining approval for new indications for tried and tested products. Unfortunately, Germany's Merck KGaA (Frankfurt Stock Exchange) has had its high hopes for Erbitux, a drug for cancer patients, dashed for a second time in less than three months when the company announced on July 5th that the drug had failed yet another clinical trial. The failure has profound implications for the growth and value of Merck's stock — as well as that of Eli Lilly and Company (NYSE: LLY) and Bristol-Myers Squibb Company (NYSE: BMY) – as Erbitux is Merck's second-best selling drug with expected sales of slightly over US$1 billion worldwide in 2012.
Merck KGaA, also known as "German Merck," is unrelated to the large American pharmaceutical firm Merck & Co., Inc. The two firms separated in 1917 due to hostilities in World War I. German Merck is traded on the Frankfurt Stock Exchange under the symbol "MRK," while Merck & Co., Inc. is traded on the New York Stock Exchange under the "MRK" ticker symbol. All references to "Merck" in this article are to the German Merck.
Merck markets the drug throughout the world with the exceptions of the United States and Canada. Both Eli Lilly and Bristol-Myers Squibb market Erbitux in the United States and Canada. Erbitux was originally developed by Imclone Systems, now a wholly owned subsidiary of Eli Lilly. As Erbitux is manufactured and sold by Merck, Eli Lilly, and Bristol-Myers Squibb under license from ImClone Systems, the recent trial and approval developments are expected to have a negative impact on ImClone's earnings, at least for the short term.
Erbitux was first approved by the U.S. Food and Drug Administration (FDA) in 2004 for the treatment of metastatic colorectal cancer and gained an additional approval by the FDA in 2006 for the treatment of head and neck cancer. The company announced in May that in a clinical trial Erbitux failed to show any therapeutic benefit for cancer patients suffering from certain types of non-metastatic colorectal cancers. In this week's announcement, Merck stated that the drug failed to show that it increased the life expectancy of people suffering from gastric cancer without their condition worsening.
Market analysts had stated prior to the announcement that an approval of Erbitux for gastric cancer would have raised expected worldwide sales of the drug by over US$365 million per year. Investors in Merck are now anxiously awaiting a decision by the European Medicines Agency (EMA), expected later this year, regarding the use of the drug in the treatment of certain forms of lung cancer. The company has stated, however, that its expectations for such approval by the EMA are "low." Market analysts not affiliated with Merck are even more pessimistic. The general consensus on the expected action by the EMA is that the real prospect for approval is "essentially zero."
Eli Lilly and Bristol-Myers Squibb's combined sales figures for Erbitux for the U.S. and Canada are approximately US$703 million per year.
However, the news for Erbitux is not entirely bad. On Friday, July 6, barely 24 hours after Merck's announcement in Darmstadt of the second failed clinical trial of the drug, Eli Lilly and Bristol-Myers Squibb jointly announced that the FDA had approved Erbitux for additional therapeutic use in the United States, in treating certain types of colorectal cancer in patients who test negative for a certain type of gene mutation. The FDA also approved a test for the gene mutation which will enable physicians to more efficiently use the drug only on those cancer patients who test negative for the mutated gene. The test was developed by Qiagen, N.V. (NASDAQ: QGEN). Until now, physicians have been using tests that were not approved by the FDA. The approved test is expected to generate approximately US$20 million per year for Qiagen. The effect that the test will have on the income of Eli Lilly, Bristol-Myers Squibb, and ImClone that is derived from Erbitux is not yet known.
However, the setbacks Merck has suffered with two failed clinical trials during the past two months — and a third major clinical drug failure most realistic observers expect in the next month or so — cannot be offset by any gains Erbitux may experience through the FDA's approval of the drug for certain patients with colorectal cancer and the approval of the Qiagen test, since the company has no interest at all in the U.S. and Canadian markets for Erbitux.
Merck's recent track record in predicting the results of clinical trials is not good. Pharmaceutical industry analysts are justifiably skeptical of any claims by Merck that Erbitux will continue to be a company sales leader due to new applications for the drug. Therefore, I find it difficult to maintain an optimistic attitude about Merck's revenue, earnings, and stock value for at least the remainder of 2012.
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