Friday, November 19, 2010

What Is Merck's Anacetrapib Program REALLY Worth -- TODAY -- To Whitehouse Station?

Anacetrapib is still at least eight years from FDA approval, perhaps even longer.

How so? Well, consider:

Merck could try to get FDA approval of a New Drug Application (or NDA), on Anacetrapib, using only the safety study -- called DEFINE -- only 1,200 or so patients, the one just announced at AHA. That study was not powered to show efficacy, though it did present some pretty encouraging results.

The FDA would nearly certainly reject the NDA, on that basis, given the mortality problems Pfizer had with a very similar drug in this class. So, Merck itself has announced a 30,000 patient, event driven trial called REVEAL -- to figure out, on CV outcomes, [strokes, heart attacks, etc. -- significant outcomes] whether anacetrapib is likely to be better than existing statin therapy.

Separately, recall that Merck is currently running an 18,000 patient, event-driven CV study called IMPROVE-IT, on Vytorin®/Zetia®. It started in 2006, it is now expected by Merck to end in 2013, and be published in 2014 or so.

That's eight years. "Event-driven" trials require enough CV events to occur for the results to be meaningful, before the study may end. It is not a study covering a fixed number of years. Now, I have actually guessed that Merck might get lucky on REVEAL, and reach that required number of events -- in only eight years -- even though the study involves almost twice as many patients (30,000 vs. 18,000). It might.

So I've given Merck full credit, here assuming that the drug will show powerful enough efficacy that the control arm will reach a statistically significant number of additional CV events, compared to the Anacetrapib arm -- in half the "normal" expected time. Are you with me so far? Eight years. Good.

Now, even if it is a $10 billion a year drug in 2018 and beyond, the discounted present value (factoring both probability of failure, and interest rates into the discount). . . make this maybe -- MAYBE -- a eight penny per share event, for 2010.

To the math, here, then: $10 billion, times a .1 probability (or 10 percent) of occuring in 2018 = $1 billion.

$1 billion of revenue, on a 50% gross margin = gross profit of $500 million, in 2018.

After tax net earnings of 60% of that = $300 million.

The present value of $300 million, paid in 2018 (using a 3% interest/discount rate) = .78665735 (monthly compounding) times $300 million, or $236 million today. . .

And so, $236 million today, divided by roughly 3.08 billion Merck common shares outstanding, at end of Q3 2010. . . equals about $0.08 per share.

So, the present value of what Merck will get, from Anecetrapib, is about eight pennies per share, for several years -- and all after 2018. The specific numbers may move around a bit (feel free to plug your own values into this free calculator, at UIC -- and see where it comes out), but the order of magnitude is solid.

Thus, the NYSE has it right. It is good news; but this is a "show me" market.

No comments: