Merck (MRK) Beats on Q4 Earnings & Sales as Keytruda Shines

Merck & Co., Inc.MRK reported fourth-quarter 2018 adjusted earnings of $1.04 per share, which beat the Zacks Consensus Estimate of $1.03. Earnings rose 6% year over year (up 11% excluding the impact of currency)

Including acquisition- and divestiture-related costs, restructuring costs and certain other items, earnings per share were 69 cents against a loss of 39 cents in the year-ago quarter.

Revenues for the quarter rose 5% year over year to $11 billion, beating the Zacks Consensus Estimate of $10.93 billion. Currency movement negatively impacted revenues by 3%. Excluding currency impact, sales rose 8% year over year.

While sales were hurt by negative currency impact, it benefited from easy comparisons with the year-ago quarter when sales were lost due to the cyber-attack that occurred in June 2017.

Strength in cancer drug, Keytruda, Gardasil vaccine and Animal Health unit offset headwinds from loss of exclusivity (LOE) for some products and competitive pressure for Zostavax and Zepatier.

Quarter in Detail

The Pharmaceutical segment generated revenues of $9.83 billion, up 6% (up 8% excluding Fx impact) year over year as higher sales in oncology and vaccines were offset by lower sales in virology. As in the previous quarters, loss of market exclusivity for several drugs hurt the top line.

Keytruda, the largest product in Merck's portfolio, generated sales of $2.15 billion in the quarter, up around 14% sequentially and 66% year over year. Sales were driven by the launch of new indications globally. Keytruda sales are gaining particularly from strong momentum in first-line lung cancer indication as it is the only anti-PD-1 approved in first-line setting.

Keytruda is already approved for many types of cancers and treatment settings including lung cancer, melanoma, head and neck cancer, classical Hodgkin's lymphoma and bladder cancer.

In October, Keytruda gained FDA approval for first-line treatment of metastatic squamous NSCLC -a difficult-to-treat lung cancer patient population based on data from the KEYNOTE-407 study. It was also approved for metastatic merkel cell carcinoma, a rare form of skin cancer in the United States and for high-risk stage III melanoma patients in the adjuvant setting in the EU in December. Early this year, the Japanese regulatory authorities granted five new label expansion approvals to Keytruda. These label expansion approvals should drive sales of Keytruda higher in the future quarters.

Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter.

Lynparza alliance revenues were $62 million in the quarter compared with $49 million in the previous quarter. Lenvima alliance revenues were $71 million compared with $43 million in the previous quarter.

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.

In the hospital specialty portfolio, Bridion (sugammadex) Injection generated sales of $256 million in the quarter, up 23% year over year, driven by strong demand. Bridion was launched in China in the third quarter, which may have added to sales in the fourth quarter.

In vaccines, Gardasil/Gardasil 9 sales rose 32% to $835 million, gaining from ongoing commercial launch in China and strong growth in Europe and the United States.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $455 million, up 13% year over year.

Pharmaceutical sales were hurt by biosimilar competition for blockbuster drug, Remicade in Merck's marketing territories in Europe and loss of U.S. market exclusivity for Zetia and Vytorin. Sales of Zepatier and Zostavax also declined in the quarter.

Remicade sales declined 34% to $123 million in the quarter. Please note that Merck markets Remicade in partnership with J&J JNJ .

The Zetia/Vytorin franchise recorded sales of $245 million, down 52% due to loss of exclusivity for both Zetia and Vytorin.

Zepatier brought in sales of $108 million, down 64% year over year on reduction in patient volume due to increasing competition. Management expects the negative trend to continue.

Zostavax vaccine sales declined 55% to $54 million in the quarter as it faced strong competition from Glaxo's GSK newly approved shingles vaccines, Shingrix. Zostavax sales are expected to be hurt by this competitive pressure, going forward.

Januvia/Janumet (diabetes) franchise sales declined 4% to $1.47 billion due to continued pricing pressure. Sales of Isentress declined 9% to $280 million.

Merck's Animal Health segment generated revenues of $1.04 billion, up 6% (up 11% excluding Fx impact) from the year-ago quarter, driven by higher sales of its companion animal products as well as livestock products, particularly swine and poultry products.

Adjusted gross margin came in at 75%, up 70 basis points (bps) from the year-ago quarter driven primarily by favorable product mix, which offset unfavorable effects of pricing pressure.

Selling, general and administrative (SG&A) expenses were $2.64 billion in the reported quarter, flat year over year. Research and development (R&D) spend rose 1% to $2.12 billion in the quarter.

2018 Results

Full-year 2018 sales rose 5% to $42.3 billion, marginally beating the Zacks Consensus Estimate of $42.2 billion. Revenues were within the guided range of $42.1 billion - $42.7 billion

Adjusted earnings for 2018 were $4.34 per share, beating the Zacks Consensus Estimate of $4.33 and up 9% year over year. Earnings were within the guided range of $4.30-$4.36 per share.

2019 Outlook

Merck issued decen t earnings and sales guidance for 2019.

Merck expects revenues to be in the range of $43.2 billion - $44.7 billion. The Zacks Consensus Estimate is pegged at $44.24 billion. Adjusted earnings are expected to be in the range of $4.57-$4.72. The Zacks Consensus Estimate stands at $4.64 per share. Both revenue and adjusted earnings guidance includes approximately 1% negative impact from currency fluctuation.

Adjusted operating expenses are expected to increase year over year at a low- to mid-single digit rate.

Our Take

Merck's fourth-quarter results were strong as the company beat estimates for earnings as well as sales. Its 2019 outlook was also in line with expectations. Importantly, Keytruda continued its robust performance on strong demand trends. Animal health and vaccine products are also performing strongly and remain core growth drivers for Merck.

Shares were up 1.7% in pre-market trading . Merck's shares have outperformed the industry in the past year. It has risen 27.9% in the said time frame against a 0.2% decrease for the industry.

Going forward, growth from key products like Keytruda, Lynparza, Gardasil, Bridion and Animal Health should make up for headwinds from LOEs, softness in the diabetes franchise, and competitive pressure on Zepatier and Zostavax.

Zacks Rank

Merck currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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