Ebola Silver Bullet a Social Not Financial Win for Merck

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Merck & Co., Inc.

Since the Ebola outbreak in March 2014, big Pharma has rushed to develop a vaccination for the virus. There have been a number of high-profile failures in the space so far, but as we head into the second half of 2016, it looks like we have finally got some progress. In November last year, we learnt that Merck & Co., Inc. (NYSE:MRK) had acquired the rights to an experimental Ebola vaccine called rVSV-ZEBOV, which was at that time being independently developed by NewLink Genetics Corp (NASDAQ:NLNK). The deal saw Merck pay NewLink $30 million upfront, and an additional $20 million during the first quarter of this year when clinical trials got underway. There are also certain royalty payments involved with the deal. Shortly after, on January 5, we learnt that the trial, which had recently been derailed as a result of adverse side-effects (joint pains in about 15% of all patients treated), had been resumed at a lower dose. The lower dose came in at 300,000 vaccine particles compared to a previous treatment of 10,000,000 to 50,000,000 vaccine particles, and as a result of the steep discount, there were concerns from that it would not be able stimulate and antibodial response. However, fast forward to August, and we have just heard that the Ebola vaccine showed 100% efficacy. In groups vaccinated immediately, there were no cases of Ebola in patients from 10 days after vaccination. The significance of this is huge, and backed up by a statement made by Børge Brende, the foreign minister of Norway, which helped fund the trial, and called the vaccine a:

“Silver bullet against Ebola, helping to bring the current outbreak to zero and to control future outbreaks of this kind”

To address the science quickly, scientists created a vaccine by taking out a gene from the vesicular stomatitis virus – a virus similar in structure to, and a member of the same family of, the virus that causes rabies. Having removed the gene, they replaced it with a gene of the Ebola virus that cannot cause Ebola on its own. The question was then whether this single gene could be enough to elicit an immune response. As current results allude to, it was.

On the news, stocks of both companies are up, but in this instance, it will likely be NewLink that sees more benefit from the proven efficacy than Merck. As mentioned, Merck must pay NewLink royalties on sales of the treatment on approval in different countries in Africa. Not only this, but the company will also distribute milestone payments as certain royalty levels are reached. The problem for Merck is that the vaccine is currently targeted at healthcare professionals who are working on the front-line to contain the Ebola crisis. As such, these administrations are funded and – in turn distributed – at low prices by charities and the aforementioned health organization. Currently Merck generates around 10% of its $40 billion revenue from a number of vaccinations, including shingles and HPV, but these are prevalent in first world’s developed nations, unlike Ebola, which will likely remain in the Third World foreseeable future. However, this said, the introduction of this vaccine could be a real game changer as far as containing the Ebola virus is concerned, and while perhaps not a game changing financial win for Merck, it certainly is a game changing social win for the company. From an added value perspective, there is therefore a certain level of attributable financial value – the result of which is the stock price increase we have seen over the last couple of days.

From a short-side perspective, the success of the Merck vaccine could put pressure on both GlaxoSmithKline plc (ADR) (NYSE:GSK) and Johnson & Johnson (NYSE:JNJ), both of which are developing their own treatments in combination with a number of small organizations and international health authorities. Johnson & Johnson committed up to $200 million to accelerating significant expand Ebola vaccine production late last year, and if Merck can demonstrate efficacy in this trial and in turn, a wider scale global trial scheduled for next year, this could be a wasted commitment.

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