Imagine a world where male pattern baldness is irreversible, human papillomavirus is inevitable, and a routine asthma attack could spell death. That’d be a world without Propecia, Gardasil and Singulair, which would mean no Whitehouse Station, N.J.-based Merck & Co. Inc. (MRK), one of the largest pharmaceutical companies in the world, only outsized by Pfizer Inc. (PFE) and Novartis AG (NVS). In 2013, Merck sold roughly $45 billion worth of drugs that do everything from fight the flu in humans (Afluria) to increase muscle mass in cattle (Zilmax). Merck also publishes some of the definitive titles in medical reference, but makes the overwhelming bulk of its money via its pharma operations.

The company’s roots go back to Germany in the 17th century. 200 years later, a Merck descendant crossed the Atlantic and set up the company’s U.S. operations. Shortly thereafter, the federal government, wary of anything with a Teutonic origin, straight-up commandeered Merck at the onset of World War I, reestablishing it as separate from its parent. The two companies remain distinct to this day.

Easy Pills To Swallow

Some 85% of Merck’s revenue is derived from its pharmaceutical operations, and most of that from just 10 drugs. By far, Merck’s best seller is Januvia, an enzyme inhibitor that treats Type II diabetes. Merck sold more than $4 billion worth of Januvia last year, or around 400 million doses. With the number of Type II diabetics increasing tenfold over a generation, drugs such as Januvia represent something of a growth industry.

Merck’s second-biggest offering by revenue – to the tune of $2.7 billion a year – is cholesterol-lowering drug Zetia. It retails for around $6.60 a pill and accounts for about 400 million doses a year.

And if your colon is ulcerated, inflamed, or otherwise in bad shape, chances are good that your physician will prescribe Remicade. That Merck creation earned the company $2.3 billion in the latest fiscal year and treats ulcerative colitis, Crohn’s disease and related conditions. Those ailments are considerably less widespread than are Type II diabetes and high cholesterol; only around half a million people in the U.S. and Canada are being treated with Remicade. But with few players in the industry, even fewer capable of synthesizing such a drug, and patent law granting Merck years of exclusivity anyway, it should be no wonder that Remicade is expensive. Classified as a specialty medication, a vial of Remicade will run close to $900. Merck sold 2½ million doses of Remicade last year, which fortunately requires only intermittent administration in the neighborhood of once a month.

The aforementioned Gardasil is another specialty medication, a vaccine intended for adolescents of both sexes. It protects girls from the risk of future vaginal and vulvar cancers, and boys from the less cataclysmic but still unpleasant risk of genital warts. As a vaccine, unlike Januvia and Zetia, Gardasil is taken once only – in a series of three administrations over a six-month period. Again, with only a single chance to profit off each patient, Merck sets its prices accordingly. Each half-milliliter syringe costs about $230, contributing $1.8 billion to Merck’s revenues annually. That’s 8 million doses, which means that slightly more than half of the kids eligible and recommended for Merck’s HPV vaccine are actually receiving it. The market is nowhere near saturated.

Widely Prescribed, Too

The roster of Merck’s best-selling pharmaceuticals contains a mix of both expensive specialty medications and cheap daily drugs. The company grosses an additional $1.8 billion off Janumet, another Type II diabetes treatment. At a mere $5 a pill Janumet is among Merck’s least expensive per-use drugs. And, not surprisingly, another one of its most prescribed, at a million doses a day.

From the mid-1980s until recently, human immunodeficiency virus drugs were among the costliest in pharma. The science was novel, the patient population small, and the effects often too inconclusive to make pronouncements about. Then came the integrase (a type of enzyme) inhibitors in the early 2000s, a new class designed to fight HIV infection. Among the first to be approved by the U.S. Food and Drug Administration was Isentress, developed by Merck and remarkably less expensive than many of its predecessors. Isentress is among Merck’s fastest-growing new drugs with sales of over $1.6 billion last year. Approved for use in 2007, and for use by children in 2012, Isentress runs about $50 per pill. Granted, patients take the pills twice a day, and typically in combination with one or two other drugs, but $100 worth of Isentress daily is still a bargain when compared with the course of treatment (and long-term prognosis) for a HIV patient even as little as 20 years ago. Doing the math, Isentress is prescribed for as few as 45,000 patients. A market that small can still be profitable when the product they’re buying is of such vital importance.

The Bottom Line

Some multinationals sell carbonated sugar water. Others profit from the spread between borrowing money and then lending it out at a higher interest rate. But few can produce products that save or lengthen the lives of millions of sick people (or at least make them far more comfortable). Whether combating river blindness in Zambia or treating arthritis in Canada, Merck continues to prove its worth in the marketplace and among demanding investors.


Tickers in this Article: MRK, PFE, NVS

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