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Merck (MRK) Beats on Q3 Earnings & Sales, Updates Guidance

Merck & Co., Inc. MRK reported third-quarter 2020 adjusted earnings of $1.74 per share, which comprehensively beat the Zacks Consensus Estimate of $1.44. Earnings rose 16% year over year (up 18% excluding the impact of currency) helped by higher revenues and lower operating expenses in the quarter.

Including acquisition and divestiture-related costs, restructuring costs and certain other items, earnings per share were $1.16, up 57% year over year.

Revenues increased 1% year over year (up 2% excluding currency impact) to $12.55 billion. Sales also beat the Zacks Consensus Estimate of $12.15 billion. The performance was driven by both Pharmaceutical and Animal health segment. However, sales of several of Merck’s medicines, especially Human Papillomavirus vaccine Gardasil 9, were hurt due to COVID-19 related mobility restrictions.  The company had estimated pharmaceutical revenues to suffer a negative impact of $475 million for the quarter due to the pandemic.

Quarter in Detail

The Pharmaceutical segment generated revenues of $11.32 billion, up 2% (up 2% excluding Fx impact) year over year driven by strong demands for cancer drugs and certain hospital acute care products. However, the negative impact of the COVID-19 pandemic on prescription trends of some drugs and generic competition for legacy drugs partially offset the growth.

Keytruda, the largest product in Merck’s portfolio, generated sales of $3.72 billion in the quarter, up 21% year over year. Keytruda sales have been gaining particularly from continued strong momentum in lung cancer indications and continued uptake in newer indications.

Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter, reflecting continued uptake in approved indications in the United States, Europe and China. Merck has a deal with Swiss pharma giant AstraZeneca AZN to co-develop and commercialize PARP inhibitor, Lynparza and a similar one with Japan’s Eisai for tyrosine kinase inhibitor, Lenvima.

Lynparza alliance revenues increased 59% year over year to $196 million in the quarter. Lenvima alliance revenues were $142 million, up 30% from the year-ago period.

In the hospital specialty portfolio, Bridion Injection generated sales of $320 million in the quarter, up 13% year over year, reflecting improved demand, following gradual removal of COVID-19 related restrictions.

In vaccines, Gardasil/Gardasil 9 sales declined 10% year over year to $1.19 billion as COVID-19 hurt sales of the vaccine due to lower back-to-school demand in the United States, partially offset by higher volumes in Europe and China.In addition, the phasing of the recovery of GARDASIL 9 demand is slower than originally anticipated, particularly in the United States.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $576 million, down 8% year over year due to lower demand. Rotateq vaccine sales gained 16% to $210 million. Sales of Pneumovax 23 vaccine gained 58% to $375 million, reflecting higher demand for pneumococcal vaccination during the COVID-19 pandemic in the United States, Europe and Japan.

Pharmaceutical sales were hurt by loss of U.S. market exclusivity for Noxafil, Emend, and Nuvaring.

Remicade sales declined 19% year over year to $88 million in the quarter. Merck markets Remicade in partnership with J&J JNJ.

Januvia/Janumet (diabetes) franchise sales gained 1% year over year to $1.33 billion, reflecting strong demand from certain international markets, partially offset by continued pricing pressure in the United States. Sales of Isentress declined 18% to $205 million.

Merck’s Animal Health segment generated revenues of $1.22 billion, up 9% from the year-ago quarter. Excluding the impact of currency, sales rose 12%, helped by higher demand for companion animal vaccines and Bravecto line of products for parasitic control.

Margin Discussion

Adjusted gross margin was 74.8%, down 110 basis points from the year-ago quarter due to unfavorable effects of pricing pressure, which were partially offset by favorable product mix.

Selling, general and administrative (SG&A) expenses were $2.2 billion in the reported quarter, down 13% year over year driven by lower selling and administrative costs due in part to the COVID-19 pandemic. Research and development (R&D) spend rose 3% to $2.3 billion, driven by higher clinical development costs and increased investment in discovery research and early drug development.

Updates 2020 View

Merck tightened its sales guidance for 2020 to reflect continued impact of the COVID-19 pandemic. However, the company raised its guidance for adjusted earnings.

It expects revenues to be in the range of $47.6 billion-$48.6 billion, tighter than the earlier guided range of $47.2 billion-$48.7 billion. COVID-19 related business disruptions are expected to hurt Merck’s 2020 revenues by $2.35 billion, higher than the previous expectation of $1.95 billion, comprising approximately $2.3 billion headwind for pharmaceuticals and approximately $50 million for Animal Health. These numbers include the impact of the first nine months of 2020.

The new guidance includes a negative currency impact of approximately 2% versus the prior expectation of a negative impact of approximately 2.5%.

Adjusted earnings are now expected to be in the range of $5.91-$6.01 compared with $5.63-$5.78 guided previously. This includes a negative currency impact of approximately 2.5%, compared with approximately 3% expected previously.

Coronavirus Related Research Efforts

Merck is developing an orally available antiviral candidate, molnupiravir, in collaboration with Ridgeback Bio for treating COVID-19 patients. Two pivotal studies are evaluating the candidate in non-hospitalized adult COVID-19 patients or hospitalized adult COVID-19 patients.

Apart from a treatment for coronavirus infection, Merck is also developing two vaccines — V590 and V591 — in early-stage studies for coronavirus. V590 is being developed in collaboration with International AIDS Vaccine Initiative.

Our Take

Merck’s third-quarter results were promising as the company beat estimates for both earnings and sales. Although COVID-19 related business disruptions hurt Merck’s third-quarter revenues by $475 million, it was an improvement compared to second-quarter’s impact of $1.6 billion. Moreover, blockbuster cancer drug, Keytruda continued to do well and provided top-line support.

The company also raised its earnings guidance for the year, which pushed its shares up almost 1.9% in pre-market trading.  However, the sales guidance was slightly lowered as the company expects some residual negative impacts from COVID-19 in the fourth quarter.

Merck’s stock has declined 13.3% this year so far compared with a decrease of 3.1% for the industry.

Zacks Rank

Merck currently carries a Zacks Rank #3 (Hold). A better-ranked stock from the biotech sector is Horizon Therapeutics HZNP, carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Horizon’s earnings estimates have risen from $2.86 per share to $2.89 per share for 2020 and from $4.34 per share to $4.40 per share for 2021 over the past 30 days. The stock has gained 113.5% this year so far.

Merck Co., Inc. Price, Consensus and EPS Surprise

Merck  Co., Inc. Price, Consensus and EPS Surprise

Merck Co., Inc. price-consensus-eps-surprise-chart | Merck Co., Inc. Quote

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