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Merck (MRK) Surpasses Q1 Earnings and Revenue Estimates

Merck & Co., Inc. MRK reported first-quarter 2019 adjusted earnings of $1.50 per share, which beat the Zacks Consensus Estimate of $1.39. Earnings rose 23% year over year.

Including acquisition- and divestiture-related costs, restructuring costs and certain other items, earnings per share were $1.26, up 13% year over year.

Revenues rose 11% year over year (13% excluding currency impact) to $12.1 billion, which beat the Zacks Consensus Estimate of $11.81 billion. Impact of COVID-19 on the company’s business was immaterial in the first quarter.

However, the company lowered its revenue and earnings guidance for the full year to include the impact of COVID-19.

Last month, Merck announced that the new publicly traded company, which will be created for the intended spin-off of its Women’s Health unit, legacy drugs (including Zetia and Vytorin) and biosimilar products will be named Organon & Co. The company plans to complete the separation in the first half of 2020.

Shares were down 2.4% in pre-market trading. Merck’s shares have declined 7.7% so far this year against 0.9% increase of the industry.

Quarter in Detail

During the quarter, sales of the human health business was negatively impacted in Asia-Pacific region due to social distancing measures and reduced access to health care providers. Sales in other markets, especially Europe, had a favorable impact due to stockpiling by customers to avoid any supply issues.

The company stated that although there is strong demand for its physician-administered products, which bring almost two-third of the company’s pharmaceutical revenues. However, sales of these products are being hurt due to social distancing measures, fewer patient visits and delays in elective surgeries due to COVID-19. As a result, the company saw lower administration trends of several of its medicines (including Keytruda) and vaccines

The Pharmaceutical segment generated revenues of $10.66 billion, up 10% (up 12% excluding Fx impact) year over year driven by higher oncology drugs and vaccines, partially offset by lower sales of several legacy products due to loss of market exclusivity.

Keytruda, the largest product in Merck’s portfolio, generated sales of $3.3 billion in the quarter, up 45% year over year. Keytruda sales are gaining particularly from continued strong momentum in first-line lung cancer indication and continued uptake in newer indications including renal cell carcinoma and adjuvant melanoma.

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

Lynparza alliance revenues were $145 million in the quarter compared with $132 million in the previous quarter. Lenvima alliance revenues were $128 million compared with $124 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 $299 million in the quarter, up 17% year over year. However, the company anticipates decline in sales of this drug in the remaining three quarters of 2020 due to the impact of COVID-19.

In vaccines, Gardasil/Gardasil 9 sales surged 31% year over year to $1.1 billion benefiting from timings of a shipment and public sector purchases in China and the United States, respectively. Higher demand in China and Europe as well as favorable pricing in the U.S. markets also boosted sales. However, these gains were partially offset by unfavorable effects of COVID-19 in certain markets, particularly in the United States and Hong Kong.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $435 million, down 12% year over year. Pneumovax 23 and Rotateq vaccines rose 39% to $256 million and 5% to $222 million, respectively.

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

Remicade sales declined 28% year over year to $88 million in the quarter. Please note that Merck markets Remicade in partnership with J&J JNJ. Vytorin recorded sales of $53 million, down 45% from the year-ago quarter.

Januvia/Janumet (diabetes) franchise sales declined 6% year over year to $1.28 billion due to continued pricing pressure in the United States. Sales of Isentress declined 4% to $245 million.

Merck’s Animal Health segment generated revenues of $1.2 billion, up 18% (up 21% excluding Fx impact) from the year-ago quarter, driven by higher sales of its livestock products, particularly products added from the acquisition of Antelliq as well as COVID-19-related stockpiling.

Margin Discussion

Adjusted gross margin was 75.5%, down 440 basis points from the year-ago quarter due to unfavorable manufacturing variances and the negative impact of pricing pressure.

Selling, general and administrative (SG&A) expenses were $2.3 billion in the reported quarter, down 7% year over year driven by lower selling and administrative costs due in part to the COVID-19 pandemic, and favorable impact of foreign exchange movement. Research and development (R&D) spend rose 10% to $2.2 billion in the quarter due to ongoing clinical studies and cost related to early drug development.

New 2020 Guidance

Merck issued new earnings and sales outlook for 2020 to include impact of COVID-19. The company assumes the majority of the negative impact in the second quarter. The business will start returning to normalcy gradually in the third quarter and be normal in the fourth quarter. It expects revenues to be lower by $2.1 billion from the previously guided range. The decline comprises approximately $1.7 billion for pharmaceuticals and approximately $400 million for Animal Health.

It expects revenues to be in the range of $46.1 billion – $48.1 billion compared with the guided range of $48.8 billion – $50.3 billion. The new guidance includes a negative currency impact of approximately 2.5%. The Zacks Consensus Estimate stands at $48.78 billion.

Adjusted earnings are expected to be lower in the range of $4.12–$4.32, compared with $5.62–$5.77 guided previously. This includes a negative currency impact of approximately 3.5%. The Zacks Consensus Estimate is pegged at $5.66.

The company now expects adjusted operating expenses to decrease year over year at low-single digit rate. Previously, it expected the figure to increase year over year at a low-single digit rate.

Our Take

Merck’s first-quarter results were impressive as the company beat estimates for both earnings and sales. Keytruda continued its robust performance on strong demand trends and label expansions. Gardasil/Gardasil 9 sales also returned to growth in the quarter

However, the company expects COVID-19 to negatively impact its business in 2020 and has lowered its guidance for both earnings and revenues. However, the company assumes the business to start returning to normalcy in the third quarter. Any setback to its assumption, including rise in coronavirus infections or a second wave of the infection, will likely lead to further decline in revenues. However, the company is active involved in developing a vaccine or a drug for restricting or treating SARS-CoV-2.

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

Zacks Rank & Stock to Consider

Merck currently carries a Zacks Rank #3 (Hold). A better-ranked large-cap pharma stock is Eli Lilly and Company LLY with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lilly’s earnings estimates have increased from $6.77 to $6.81 for 2020 and from $7.93 to $8.02 over the past 30 days.

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