Merck puzzled by abrupt drop in Gardasil sales in China

Merck's strong performance in the pharmaceutical market was recently overshadowed by an unexpected decline in Gardasil sales in China. While the company celebrated robust sales figures for its new pulmonary arterial hypertension (PAH) treatment, Winrevair (sotatercept), and its renowned cancer drug, Keytruda, the slight growth in Gardasil’s revenue came as a shock.

Gardasil, an HPV vaccine that has seen significant success over the past decade due to high demand in China, reported a revenue of $2.48 billion in the second quarter. This represents a mere 1% increase compared to the previous year. Outside of China, Gardasil experienced growth driven by higher pricing, increased demand, and favorable public-sector purchasing patterns in the U.S. and other international markets. However, these gains were counterbalanced by a decline in sales within China, attributed to the timing of shipments compared to previous years.

The fallout from this news was immediate, leading to a 9% drop in Merck's share price. This decline was comparable to a similar drop in November 2021, when Pfizer announced the superior efficacy of its COVID-19 antiviral Paxlovid over Merck's Lagevrio.

Gardasil has seen remarkable revenue growth since its approval in 2006, with revenues rising from $3.9 billion in 2020 to $8.9 billion last year. The first quarter of this year continued this trend with a 14% increase in sales. China, accounting for 60-70% of Gardasil’s international sales, plays a crucial role in this growth. The vaccine is distributed in China through Merck’s commercial partner, Zhifei Biological Products.

During the second quarter, there was a surprising decrease in shipments from Zhifei to vaccination points, which deviated significantly from past trends. Rob Davis, Merck's CEO, mentioned that Merck is working with Zhifei to understand the factors behind this decline. He suggested that the entire HPV market in China faced a similar downturn, not just Gardasil. Additionally, Davis noted that China's recent "anti-bribery" and "anti-corruption" initiatives, launched earlier this year, have impacted HPV sales.

Despite these setbacks, Merck remains optimistic about Gardasil’s future in China, noting that more than 60% of eligible females have yet to be vaccinated for HPV. The company is also exploring a male indication for the vaccine, which represents significant growth potential. However, short-term revenue projections might need to be adjusted if Merck has to reduce shipments to Zhifei due to growing inventory levels in China. Chief Financial Officer Caroline Litchfield indicated that this could affect the short-term revenue outlook.

Merck reported a 7% overall second-quarter revenue increase, reaching $16.1 billion. Consequently, the company revised its annual sales estimate to fall between $63.4 billion and $64.4 billion, marking a $200 million increase at the mid-point from its April projection. This new estimate represents a 6% revenue increase from 2023.

As Merck prepares for the loss of exclusivity of its top-selling drug, Keytruda, it is banking on the success of Winrevair. The PAH treatment exceeded initial expectations, generating $70 million in revenue in its first quarter on the market. Analysts had projected sales of $56 million for the quarter. Winrevair, the first disease-modifying treatment for PAH, was approved by the FDA with a broader label and fewer warnings than anticipated. By the end of June, over 2,000 patients had received prescriptions for Winrevair, with more than 500 physicians involved in writing them.

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