Merck Shareholders Feeling Heart Problems

We awoke this morning hoping to learn that Merck and a panel of cardiologists had played an early April fools’ joke on us over the weekend, but alas, no such announcement yet.  As it stands today, Vytorin and Zetia are still for sale, and, as far as we can tell, still lower LDL cholesterol values significantly better than generic Zocor, let alone a placebo.

A little background:  over the weekend, Merck and Schering-Plough (its joint venture partner on Vytorin and Zetia) released the full report of their ongoing clinical trial called ENHANCE.  This trial set out to show that these drugs do a better job than plain old Zocor of reducing heart problems in patients with a rare genetic condition called HeFH, because they do a better job of lowering cholesterol levels.  Unfortunately, the trial failed to show heart benefits for this patient population, and in fact, showed that they might increase other problems, although none were statistically significant.

Merck and Schering released most of these data in January, but the surprise of the weekend was the vitriolic tone set by a “panel” of 4 cardiologists who were assembled by the ACC (American College of Cardiology) conference.  We don’t know what to conclude about the fact that the “panel discussion” was in fact just a speech by one vendetta-minded doctor, with no participation from the other panel members, and no questions allowed from the audience.  The panel’s message was that statins (like Zocor and Pfizer’s Lipitor) need to be the first line of defense for high cholesterol, and Vytorin/Zetia need to be considered last, only if statins and other accompanying drugs don’t work.  Their concern is more about efficacy (whether the drug works) than about safety.

10 years ago, the same panel would have not reacted with such venom unless the drug in question was dangerous.  The panel’s harsh tone is representative of today’s health care strains.  Doctors are the first defense for our health care system for controlling health care costs (after patients, that is).  Therefore, the days of “good enough” and “me too” drugs are over—drugs now must hurdle a higher bar in order to pass the muster of the FDA and health insurers.  In addition, all health care forces are taking a much harder stance against DTC (direct to consumer) advertising as a means of reducing health care costs.  In particular, this panel went out of its way to criticize Merck and Schering for advertising the drugs at all, pointing out that their market share in the cholesterol category was only 3% in Canada, where DTC advertising is banned, compared to 15% in the U.S.

Certainly the market will be in wait-and-see mode to see how prescribing trends for the drugs change each week, and will have rendered another verdict after seeing a few data points.  Our best guess is that new prescriptions will dry up, but most patients now taking the drugs will continue to use them (presuming they were already working to lower cholesterol).  As for Merck, obviously they stand behind their drugs, and are emphasizing a new, much larger (18,000 targeted), much broader trial which will wrap up in 2011. We continue to believe in the drug industry, and in particular Merck.  Merck has a strong stable of up-and-coming blockbusters, and could get approval of a couple more in the coming months.  Even if the Vytorin/Zetia joint venture were to be disbanded, Merck’s estimated earnings in 2012 would still be $3.60, meaning a very cheap P/E of 10.

In the meantime, it might be worth knowing that despite Merck’s $6.56 per share drop, our 24 Core large-cap growth stocks were up an average of 0.42% yesterday, actually better than the Dow’s gain.


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