Merck CEO Ken Frazier kicked off Thursday’s Investor Day presentation by acknowledging that the company’s most recently lauded blockbuster, immuno-oncology drug Keytruda, is also its biggest challenge.
“Everywhere I go, the key question I hear from people is ‘What do you have beyond Keytruda?’” Frazier said in his introduction to the investor presentation—the company’s first such event in five years. “But I think what we’re going to be able to show you today is that we do have tremendous growth opportunities beyond Keytruda.”
It’s no wonder Frazier finds himself constantly facing the Keytruda question, considering how dominant that one product has been in Merck’s financial reports over the last few years. Even as recently as the first quarter of this year, when Keytruda’s sales leaped 60% to $2.3 billion, the company touted the recent successes that Frazier and his colleagues vowed would drive growth even more, including its new FDA approval for the first-line treatment of non-small cell lung cancer patients who have low levels of the biomarker PD-L1.
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During Investor Day, Merck’s chief commercial officer, Frank Clyburn, pointed out that Keytruda is just now starting to forge another new market—renal cell carcinoma. He reported that at the recent conference of the American Society of Clinical Oncology (ASCO), clinicians told him the data in kidney cancer would be “practice changing.” Oncologists were also excited about the potential of the drug in adjuvant melanoma, both in the U.S. and overseas, he said.
CFO Rob Davis said he is confident that as Merck moves away from selling drugs mostly to a primary-care audience toward more hospital-administered products, the company’s profit margins will expand. Operating expenses will grow at a rate “meaningfully below sales,” he said. And the resulting margin expansion “will translate to accelerated earnings-per-share growth,” he vowed.
Still, there was that nagging question about life beyond Keytruda. Roger Perlmutter, president of Merck Research Laboratories, took the stage and told the crowd that the company’s R&D operation offered an “enormously stable platform” for continuing to pump out hit drugs.
Nevertheless, the pipeline discussion did start with Keytruda, which the company pointed out is currently the centerpiece of more than 1,000 clinical trials.
Chief Medical Officer Roy Baynes noted that the drug has proven active in more than 25 cancer types, only 14 of which have already been approved for marketing. The company’s PowerPoint presentation (PDF) included two densely illustrated slides summing up clinical trial data showing Keytruda has not only shrunken a range of tumor types but also shown survival benefits over other cancer therapies, both by itself and in combination with other products.
He then moved on to two of Merck’s other oncology successes, Lynparza and Lenvima, suggesting that they, too, have a large runway ahead of them. Lynparza, currently approved to treat women’s cancers, is also being tested in pancreatic cancer, prostate cancer and lung cancer, for example. Lenvima, which is approved for thyroid and renal cell cancers, is in trials in more than five other tumor types.
Baynes also discussed some of Merck’s R&D activities beyond oncology, including its efforts to develop new HIV medications that are less cumbersome for patients than currently marketed products, and its research aimed at global health threats like dengue and cytomegalovirus.
Keytruda isn’t the only product in Merck’s pipeline with the potential to reach several different patient populations, the company’s executives stressed during the investor event. For example, they hailed gefapixant (formerly MK-7264), as a “potential pipeline in a product.” Mike Nally, chief marketing officer, explained that the drug, which targets a sensory pathway called P2X3, could prove useful for treating a range of disorders, including sleep apnea, chronic cough and endometrial pain.
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Frazier came into the investor day on the heels of reports that the company is already looking for his replacement. Both Clyburn and Nally were cited by anonymous sources as potential successors. This despite the fact that last year, Merck’s board scrapped a longstanding rule that its CEOs retire at age 65, making it clear to investors that the executive who has presided over the company’s Keytruda-fueled growth spurt won’t be leaving anytime soon.
Frazier hasn’t completely escaped criticism during his tenure, particularly on the topic of business development. Analysts have frequently criticized him for failing to pursue deals that could bolster Merck’s near-term pipeline.
The topic of the CEO succession plan didn’t come up in the formal portion of Merck’s investor day presentation—but dealmaking most certainly did. Davis said that even after having completed more than 60 transactions in 2018, the company has plenty of free cash flow to pursue deals. That cash, combined with the strength of Merck’s balance sheet, he said, gives the company “ample firepower to frankly do any form of business development or other investment to drive growth that we would choose to do—that we think creates value.”
