After Merck noted the issue in its Q2 earnings call without providing specifics, analysts are left in the dark about the HPV vaccine’s future in China.
Merck’s Q2 earnings last week began with good news as the cancer drug Keytruda and its HPV vaccine Gardasil continued to pull in billions of dollars in sales. However, management did note an issue with Gardasil.
On the earnings call, Merck CFO Caroline Litchfield said there was a “significant step down” in shipments from its distributor in China, causing “above-normal inventory levels” of Gardasil. The vaccine’s Chinese distributor, Chongqing Zhifei Biological Products Co., had apparently sold less of the HPV vaccine than in past quarters. While the situation has caused some unease among investors and a drop in Merck’s stock price, the overall magnitude and reasons for the distribution issue are unclear. However, experts believe that if it continues, it could have a negative impact on sales in the long run.
“I think the shocking thing was the level of uncertainty,” Evan Seigerman, managing director and senior research analyst at Bank of Montreal Capital Markets, told BioSpace.
Likewise, Vamil Divan, a healthcare equity research analyst at Guggenheim Securities, said he was surprised at how little Merck revealed about the situation on the call, but he said there is “obviously a demand issue” at play.
This situation with Gardasil comes as Merck’s leading revenue maker, Keytruda, faces a patent cliff in 2028 and wider biosimilar competition.
Gardasil and the Chinese Market
Divan told BioSpace that Gardasil is Merck’s second most important product, as vaccines can give companies a long-standing revenue stream. Indeed, Gardasil brought in $2.4 billion in sales in Q2 2024. However, sales only increased by 1% from the same quarter last year. This is a slower growth rate than from Q1 of this year, when Gardasil got a 14% sales boost from Q1 2023.
Chongqing Zhifei Biological Products Co., or Zhifei, specializes in producing and distributing medicines, particularly vaccines. Zhifei and Merck struck a deal back in 2012 to distribute Gardasil in China, with Zhifei contracting to buy specific amounts of the vaccine, Fierce Pharma reported. Zhifei inked another contract last year to distribute five of Merck’s vaccines, including Gardasil, until 2026, in a deal worth over $14 billion, according to Yicai Global.
Merck CEO Robert Davis said on the earnings call that based on the intelligence that the company gathered, Gardasil’s sales have been affected by China’s anti-bribery and anti-corruption drive. Last year, China started a wide-scale anti-corruption campaign targeting hospitals, the pharmaceutical industry and insurance companies, according to CNN. Davis said Merck had not seen much impact from the drive at first, but “we believe we are starting to see it now.”
“And this is really driven by the fact that in the healthcare industry, there has been, as a result of this, a reduction in scientific engagement, primarily in the CDC within China, and fewer immunizations,” Davis continued.
He added that Merck plans to work closely with Zhifei to understand what caused the company to distribute less vaccine. Merck also plans to assess future shipments to Zhifei and work to bring “their inventory back to more normal levels,” he said.
However, Seigerman noted that the exact nature of the anti-corruption drive is still unclear, and it will be difficult to forecast its ultimate impact. “If anyone said they know exactly what the Chinese government is going to do, they’re not being truthful because it’s very hard to predict, and I think this is even harder to predict,” he said. “Vaccination campaigns are driven by public health, which is driven by the government.”
China’s Importance
China is a crucial market for Merck and Gardasil. Divan noted that the international market as a whole has been a massive growth opportunity for Gardasil and that China accounts for 67% of its total international sales, to the tune of about $4 billion to $4.5 billion per year.
Seigerman estimates that Gardasil will reach peak sales worldwide of $11 billion, though he noted that this estimate could change considering the vaccine’s concentration in the Chinese market. He added that if the distribution issue in China is just an anomaly, the estimate still stands.
Divan said that experts need clarity on the situation, whether the news is good or bad, to remove the uncertainty investors feel at the moment. “We like confidence being exuded by [a company’s] management team,” Seigerman said. “If management’s not confident, I’m not going to be confident.”
