Merck KGaA's Pipeline Issues Increase Deal Urgency

Merck KGaA experienced a significant drop in its share value on Tuesday, plummeting as much as 10%. This decline comes in response to the latest in a series of setbacks, this time involving xevinapant, and has led to increased scrutiny of the company's pharmaceutical pipeline and its ability to achieve its growth targets. Barclays analysts referred to this development as another unexpected blow to Merck's healthcare pipeline, acknowledging that while they remain optimistic about Merck's overall prospects, the company will need to work on restoring its credibility concerning its pipeline capabilities.

Xevinapant, which Merck had licensed from Debiopharm, was undergoing evaluation in two Phase III clinical trials named TrilynX and X-Ray Vision. These trials aimed to treat patients with head and neck squamous cell carcinoma (HNSCC). On Monday, Merck announced that both trials would be halted because an interim analysis revealed that TrilynX was unlikely to meet its main goal of improving event-free survival rates. This IAP antagonist was a leading candidate in Merck's oncology pipeline, and its failure follows a similar disappointment earlier in March when the BTK inhibitor evobrutinib did not meet expectations for treating multiple sclerosis.

Analysts from Stifel Nicolaus noted that these consecutive failures have left Merck with little to show for its internal and externally acquired R&D efforts, which were intended to compensate for the expected expiration of Mavenclad/Cladribine in 2027. They suggested that these setbacks significantly challenge the company's growth outlook for its healthcare business.

Morgan Stanley analysts remarked that while xevinapant was not central to their investment thesis, this adverse outcome further complicates the future prospects of Merck's healthcare division. They pointed out that there is now likely to be more internal debate on how to invigorate the R&D sector within the healthcare business, which has been negatively impacting the company's shares. Although Merck's management believes that the healthcare division could still achieve growth without xevinapant, Morgan Stanley analysts suggest that Merck might now be more inclined to redirect capital towards larger healthcare deals to rebuild its pipeline.

In March, Merck's CEO Belén Garijo highlighted a strategic pivot towards external innovation, indicating that over half of the company's future drug launches are expected to come from such sources. Garijo emphasized that these deals enable the company to select assets that best complement its existing portfolio, thereby driving its growth strategy forward.