It has been about a month since the last earnings report for Merck (MRK). Shares have added about 1.6% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Merck due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Merck Beats on Q3 Earnings and Sales, Raises 2019 Guidance
Merck reported third-quarter 2019 adjusted earnings of $1.51 per share, which beat the Zacks Consensus Estimate of $1.25. Earnings rose 27% year over year on a reported basis as well as excluding the impact of currency.
Including acquisition- and divestiture-related costs, restructuring costs and certain other items, earnings per share were 74 cents, up 1% year over year.
Revenues for the quarter rose 15% year over year to $12.4 billion, beating the Zacks Consensus Estimate of $11.7 billion. Currency movement negatively impacted revenues by 1%. Excluding currency impact, sales rose 16% year over year.
Strength in cancer drug, Keytruda, and Gardasil vaccine and a strong performance in international markets, especially China, offset headwinds from loss of exclusivity (“LOE”) for some products and competitive pressure for the diabetes franchise. Sales in China surged 84% (90% excluding Fx impact) from the year-ago period driven largely by growth in Keytruda, Lynparza, Lenvima and Gardasil.
Quarter in Detail
The Pharmaceutical segment generated revenues of $11.1 billion, up 15% (up 16% excluding Fx impact) year over year as higher sales in oncology, vaccines and hospital business were offset by lower diabetes sales. As in the previous quarters, LOE for several drugs hurt the top line.
Keytruda, the largest product in Merck’s portfolio, generated sales of $3.07 billion in the quarter, up around 18% sequentially and 62% year over year. Sales were driven by the launch of new indications globally. Keytruda sales are gaining particularly from continued strong momentum in first-line lung cancer indication and launch in newer indications namely renal cell carcinoma and adjuvant melanoma.
On the call, the company said that in the United States, in squamous and non-squamous first-line lung cancer, Keytruda continues to penetrate all eligible patient populations. Meanwhile, for recent launches in metastatic renal cell carcinoma and adjuvant melanoma, the company is seeing strong adoption rates among oncologists
In international markets, Merck witnessed strong uptake in first-line lung cancer indication. In Japan, Keytruda is seeing strong usage across all PD-L1 patient subgroups in lung cancer, and is witnessing growing market share in bladder cancer. In China, sales growth is primarily being driven by first-line lung cancer.
Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter. Lynparza alliance revenues were $123 million in the quarter compared with $111 million in the previous quarter driven by further uptake in ovarian cancer after approval in first-line maintenance setting in December as well as strength in markets such as Europe, Japan and China. Lenvima alliance revenues were $109 million compared with $97 million in the previous quarter, driven by strong performance in hepatocellular cancer in the United States, China and Japan.
In the hospital specialty portfolio, Bridion (sugammadex) Injection generated sales of $284 million in the quarter, up 31% year over year, driven by strong demand in the United States.
Vaccines sales rose 17% to $2.5 billion in the quarter. In vaccines, Gardasil/Gardasil 9 sales rose 26% year over year to $1.32 billion, gaining from higher demand in Asia Pacific (particularly in China), Europe as well as United States, which offset the impact of unfavorable public sector buying patterns in the United States.
In October, Merck borrowed doses of Gardasil from CDC stockpile to support routine vaccinations in the United States as well as to free up some manufacturing capacity to make doses for ex-U.S. markets. The stockpile borrowing is expected to reduce fourth-quarter sales by approximately $120 million.
Proquad, M-M-R II and Varivax vaccines recorded combined sales of $623 million, up 19% year over year. Sales were driven by higher demand in Europe, favorable pricing in the United States and government orders from Latin America.
Pharmaceutical sales were hurt by biosimilar competition for Remicade in Merck’s marketing territories in Europe and loss of U.S. market exclusivity for Invanz, Cubicin, Zetia and Vytorin.
Remicade sales declined 25% year over year to $101 million in the quarter. Zetia and Vytorin recorded sales of $147 million and $57 million, down 11% and 38%, respectively from the year-ago quarter due to LOE for both drugs.
Zepatier brought in sales of $83 million, down 20% year over year due to increasing competition.
Januvia/Janumet (diabetes) franchise sales declined 12% year over year to $1.31 billion due to continued pricing pressure in the United States. Sales of Isentress declined 9% to $250 million.
Merck’s Animal Health segment generated revenues of $1.12 billion, up 10% (up 12% excluding Fx impact) from the year-ago quarter, driven by higher sales of its companion animal products as well as livestock products. Excluding the impact of exchange, livestock sales grew 10% due to the contributions from the products acquired in the Antelliq acquisition while companion animal sales grew 10% in the quarter driven by the Bravecto line of products.
Adjusted gross margin came in at 75.9%, down 80 basis points from the year-ago quarter due to unfavorable manufacturing variances.
Selling, general and administrative (SG&A) expenses were $2.6 billion in the reported quarter, up 5% year over year driven by higher administrative and promotion costs, partially offset by favorable impact of foreign exchange movement. Research and development (R&D) spend rose 7% to $2.2 billion in the quarter due to ongoing clinical studies and cost related to early drug development.
Ups 2019 Guidance
Merck increased its earnings and sales guidance for 2019 for the third time this year.
Merck expects revenues to be in the range of $46.5 billion – $47 billion versus the previous expectation of $45.2 billion – $46.2 billion. The revenue growth guidance represents 10% to 11% growth from 2018 level versus 7% to 9% growth expected previously. The revenue guidance includes approximately 2% negative impact of currency fluctuation versus prior expectation of slightly more than 1%.
Adjusted earnings are now expected to be in the range of $5.12–$5.17, higher than the previously guided range of $4.84–$4.94. The earnings guidance includes approximately 1% negative impact of currency fluctuation, more onerous than the previous expectation of a slightly negative impact of currency fluctuation. The new earnings guidance indicates growth of approximately 18% to 19% from 2018 levels versus prior expectation of 12% to 14%.
The company maintained its expectation for adjusted operating expenses to increase year over year at mid-single digit rate.
Adjusted tax rate is expected to be approximately 17.5% versus prior guidance of a range of 18.5% - 19.5%.
Preliminary 2020 Outlook
Merck said that it expects revenues in 2020 to be hurt by increased pricing pressure, moderated growth rates for Gardasil and potential generic erosion of Noxafil and NuvaRing.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
At this time, Merck has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Merck has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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