Will Merck (MRK) Keep the Earnings Streak Alive in Q3?

We expect Merck & Co., Inc.MRK to beat expectations when it reports third-quarter 2017 results on Oct 27, before market opens. Last quarter, the company delivered a positive earnings surprise of 16.09%.

Merck's performance has been pretty impressive, with the company exceeding earnings expectations in all the trailing four quarters. The average positive earnings surprise over the last four quarters is 8.11%

Merck's shares have risen 7.7% this year so far, comparing unfavorably with 20.5% increase for the industry .

Factors to Consider

Merck's new products like Keytruda (cancer), Zepatier (HCV) and Bridion (sugammadex) Injection are likely to drive the top line this quarter.

Keytruda sales in the United States are gaining particularly on the back of strong momentum in the new indication of first-line lung cancer. The Keytruda development program significantly advanced in the first half with regulatory approvals for four new indications in the United States and an additional indication in Europe. Key recent approvals include that for advanced bladder cancer, advanced microsatellite instability-high cancers and first approval as a combination therapy with Eli Lilly's LLY cancer drug Alimta (pemetrexed) and carboplatin (pem/carbo) in lung cancer.

The new approvals have expanded the patient population, which is expected to drive sales in the third quarter.

However, at the Q2 call, management warned that Zepatier uptake may be impacted by the ongoing decline in overall patient volumes in many markets and increased competition. Previously, strong underlying demand trends in the United States, Europe, and Japan had supported Zepatier's sales.

The company also faces headwinds in the form of genericization as well as increasing competition and the negative impact of currency exchange.

Sales of Remicade (lost exclusivity in Europe and facing stiff biosimilar competition in the region), Cubicin (lost patent protection in the United States in June 2016), Zetia (lost market exclusivity in the United States in December 2016) and Vytorin (lost U.S. exclusivity in April 2017) are likely to decline in the quarter.

Sluggish growth of the integrase class and continued competitor dynamics in the United States and Europe will continue to affect Isentress' sales. The Zacks Consensus Estimate for Isentress sales is $306 million for the third quarter.

Investors will also be focused on the performance of Merck's DPP-4 inhibitor - Januvia. Pricing pressure hurt sales of the Januvia/Janumet franchise in the first half.

The Vaccines and Animal Health franchises are expected to boost sales this quarter. The Zacks Consensus Estimate for the Vaccines (total) and Animal Health segments is $1.83 billion and $911 million, respectively.

At the Q2 call, Merck mentioned a network cyber-attack in June that disrupted its global operations, including manufacturing, research, and sales. At that time, Merck had said that full recovery from the cyber-attack will take some time, which could result in a temporary delay in fulfilling orders of some products (not Keytruda, Zepatier and Januvia) in certain markets. We expect an update on this at the upcoming conference call.

Remediation expenses related to the cyber-attack, increased investments behind the ongoing launches and additional R&D costs associated with the new oncology collaboration with AstraZeneca are expected to result in higher operating costs in the quarter.

Earnings Whispers

Our proven model shows that Merck is likely to beat estimates this quarter because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for a likely positive surprise.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate ($1.03 per share) and the Zacks Consensus Estimate ($1.02 per share), is +0.61%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Merck has a Zacks Rank #3. The combination of Merck's Zacks Rank #3 and positive ESP makes us confident of an earnings beat in the upcoming release.

Sell-rated stocks (Zacks Rank #4 or 5), on the other hand, should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Merck & Company, Inc. Price and EPS Surprise

Merck & Company, Inc. Price and EPS Surprise | Merck & Company, Inc. Quote

Other Stocks to Consider

Other large-cap pharma stocks that have both a positive ESP and a favorable Zacks Rank include:

Bristol-Myers Squibb Company BMY , scheduled to release results on Oct 26, has an Earnings ESP of +0.79% and a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank stocks here .

Pfizer, Inc. PFE has an Earnings ESP of +0.94% and a Zacks Rank #3. The company is scheduled to release results on Oct 31.

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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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