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UPDATE 3-Merck KGaA suffers major blow as MS drug fails in late-stage trials

(Adds background on MS in paragraph 4, share price in paragraph 7, analyst comment in paragraph 8)

By Ludwig Burger

FRANKFURT, Dec 5 (Reuters) - Merck KGaA's experimental multiple sclerosis (MS) drug missed the primary goal in highly anticipated late-stage trials, dealing a major blow to the German company's growth ambitions and hitting its shares.

In two Phase III trials, the compound known as evobrutinib failed to beat Sanofi's established Aubagio in reducing MS relapse rates, Merck said in a statement late on Tuesday.

Merck was seen as ahead of Sanofi, Novartis and Roche in a four-way race to develop more targeted MS drugs in a class known as Bruton’s tyrosine kinase (BTK) inhibitors.

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Merck said an estimated 2.8 million people worldwide have MS and that the relapsing forms of the disease, which were the focus of the evobrutinib trials, are the most common.

Investors have been kept on edge over revenue prospects because of a possible link to liver damage from the drug category, which is designed to more selectively block the cells that drive the harmful autoimmune reaction behind MS.

Still, analysts have cited annual peak sales estimates for Merck's drug of well above $2 billion on average.

The group's shares plunged 14% to their lowest in five weeks on Wednesday, with JP Morgan analysts saying it was an unexpected disappointment because side effects, not efficacy, had been the main concern.

"We had assumed that the trials would be successful and the product would get to market (outside of the United States," the analysts said in a note.

After weak demand hit Merck's specialty materials businesses, analysts have said a successful launch of evobrutinib was key to the diversified group reaching its goal of generating 25 billion euros ($27 billion) in sales by 2025, up from 22.2 billion in 2022.

CEO Belen Garijo said as recently as October that the MS drug could reach annual sales over $1 billion.

That was even after U.S. regulators in April had paused enrolling new patients into an evobrutinib trial. At the time, the company said the Food and Drug Administration had cited lab results suggesting drug-induced liver injury, but the affected patients had no symptoms.

Similarly, Roche subsidiary Genentech said last month that the FDA had stopped new patient enrolment in a trial of its BTK inhibitor against MS, fenebrutinib, citing asymptomatic liver injury shown in lab readings.

Sanofi had run into similar problems with its BTK drug candidate tolebrutinib. Novartis said in April that no signs of liver damage had been seen in trials testing its BTK drug candidate remibrutinib.

For Merck's medium-sized pharma unit, the failed trials marks another major development setback after cancer drug hopeful bintrafusp alfa fell short in a 2021 trial, triggering the end of an alliance with GSK.

The diversified group flagged last month that full-year operating earnings would likely be in the lower half of its target range on weak demand for specialty materials that are used to make biotech drugs and semiconductors.

The maker of pharmaceuticals, lab gear and specialty chemicals previously raised the prospect of returning to revenue growth next year.

($1 = 0.9263 euros)

(Reporting by Ludwig Burger Editing by Bill Berkrot, Josie Kao and Louise Heavens)