Merck's risky research bets
The drug giant is looking at weight loss and cholesterol treatments that could be blockbusters -- and may pose worrisome side effects.
(Fortune) -- Merck has pulled off a remarkable comeback in the last two years. Now the pharma giant is conjuring medicines with a new scientific swagger, making two particularly risky bets.
Each of these controversial development projects - an experimental weight-loss pill and a cholesterol-lowering treatment - resemble a drug that Merck's peers, Sanofi-Aventis (SNY) and Pfizer (PFE, Fortune 500), spent nearly $1 billion to develop and yet failed to bring to the U.S. market.
Merck's progress is being closely watched. It wasn't long ago that Merck Research Labs was in the doldrums. In 2003, the company was forced to discontinue development of four potential blockbuster drugs - including a potentially lucrative antidepressant and a diabetes treatment - because its research didn't pan out.
Then came 2004's Vioxx recall and the ensuing lawsuits. The central question in the Vioxx legal cases was whether Merck's scientists knew that their arthritis pain medicine increased patients' risk of heart attack and stroke, but pushed the blockbuster to market nonetheless. Last November, Merck (MRK, Fortune 500) agreed to pay $4.85 billion to settle thousands of Vioxx product liability cases.
While the Vioxx cases were wending their way through the courts, the company's research operation was turning a corner. Since 2006, Merck has introduced eight new medicines, including Gardasil, a vaccine to prevent cervical cancer, Januvia, a diabetes medication, and Isentress, a treatment for HIV. All the while, the company has continued to orchestrate important licensing deals to help replenish its pipeline. Investors have rewarded the company's resurgence, as Merck's shares have risen 75% since the beginning of 2006.
With a renewed sense of confidence, Merck is delving into high-risk research on the weight-loss and cholesterol fronts because they offer the highest rewards. For instance the World Health Organization now recognizes obesity, for instance, as a global epidemic. Two-thirds of Americans are currently overweight and worldwide, the number of obese adults and children is expected to grow by 75% to 700 million over the next seven years. Although many drugs exist to battle weight gain, none are terribly effective and most carry uncomfortable side effects. A safe, effective weight-loss drug could easily garner $2 billion in annual sales, according to industry analysts.
The same goes for Merck's potential cholesterol-lowering medicine. Cholesterol drugs are a top-selling treatment category, lead by Pfizer's Lipitor which garnered $12.9 billion in sales in 2006. "Assuming the safety issues can be dealt with, these are huge potential markets," says Herman Saftlas, an analyst with Standard & Poors. "In the current environment, you have to take your shot," Saftlas continues, noting the research productivity drought that is plaguing Big Pharma.
The riskiest of Merck's current projects is taranabant, a treatment that until recently was hailed as an elegant solution for attacking excess weight. Rather than working in the gut, taranabant manipulates the brain to suppress appetite. More specifically, the drug acts on the same receptors in the brain that cause marijuana-smokers to experience hunger. Taranabant, in essence, causes a patient to experience the reverse-munchies.
This month, however, a review of data on taranabant in the January issue of the scientific journal Cell Metabolism finds that although the treatment helps obese patients shed pounds, at higher doses it causes "psychiatric side effects." Those ill effects could draw closer scrutiny from the FDA when Merck files taranabant for approval later this year.
In the published review, researchers note that patients in a mid-stage study of the Merck drug lost 8 to 14 pounds over a 12 week period. The 553 patients were taking doses of taranabant ranging from 0.5 milligrams to 6 milligrams. Researchers noted that some patients experienced depression, anxiety, and irritability.
Merck has publicly disclosed its taranabant results to scientific peers and investors - once at a medical meeting in New Orleans last October, and again last month in its annual business briefing with investors and financial analysts. And the review is consistent with work Sanofi-Aventis did on a similar drug sold in Europe as Zumulti. Sanofi's drug failed to gain U.S. approval last summer due to its side effect profile, which experts say included suicidal thoughts and depression in some patients.
Merck officials say their drug differs from Sanofi's enough to warrant further research.
"We think taranabant could be a valuable tool for physicians and patients," says Merck spokesperson Amy Rose. "But its midway through phase III studies right now. Once those studies are done, we'll be able to make a better decision on whether to file [for FDA approval] or not."
As if its research on taranabant weren't risky enough, Merck's scientists are conducting phase II studies on the cholesterol medicine, anacetripib. This drug is similar to a Pfizer compound known as torcetripib, which increased blood pressure and cardiovascular risk in some patients in a late-stage 2006 trial. Pfizer abandoned research on torcetripib in December of 2006, after spending roughly $800 million on its discovery and development.
The Merck treatment regulates the body's "cholesteryl ester transfer protein" or CETP, raising "good" cholesterol while lowering "bad" cholesterol. In its studies of anacetripib thus far, Merck scientists say they have not seen increases in patient blood pressure or cardiovascular risk that Pfizer observed with its cholesterol drug.
Could Merck derail its comeback if its taranabant and anacetripib projects fail? Deutsche Bank analyst Barbara Ryan doesn't believe so. "If these drugs were to fail, I don't think it would be a negative. Merck's valuation is based on the new products, which are doing well. And these experimental treatments are at least five or six years from being on the market."
Mike Krensavage, an analyst with Raymond James & Associates agrees. "Both taranabant and anacetripib are risky bets. But they're risks worth taking," says Krensavage.
The question is whether Merck can succeed where the world's two largest drug companies failed. 
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