Merck (MRK) Beats on Q3 Earnings, Lags Sales, Ups EPS View
Merck & Co., Inc. MRK reported third-quarter 2018 adjusted earnings of $1.19 per share, which beat the Zacks Consensus Estimate of $1.16 by 2.6%. Earnings rose 7.2% year over year.
Including acquisition/divesture related costs, restructuring expenses and a charge related to the termination of a collaboration agreement with Samsung Bioepis, earnings per share were 73 cents against a loss of 2 cents in the year-ago quarter.
Revenues for the quarter rose 5% year over year to $10.79 billion. Sales, however, missed the Zacks Consensus Estimate of $10.87 billion. Currency movement negatively impacted revenues by 1%. Excluding currency impact, sales rose 6% year over year.
While sales were hurt by negative currency impact, it benefitted from easy comparisons with the year-ago quarter.
Strength in Keytruda, Gardasil and Animal Health 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 $9.66 billion, up 5% (up 7% excluding Fx impact) year over year as higher sales in oncology, vaccines and hospital acute care areas 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, brought sales of $1.89 billion in the quarter, up 13% sequentially and 80% 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 the quarter, Keytruda gained FDA and EU approval to include overall survival data from a key late-stage lung cancer study, KEYNOTE-189 study on its label. It was also approved in China for advanced melanoma. These label expansion approvals are expected to drive sales of Keytruda in the future quarters.
Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter.
Lynparza alliance revenues were $49 million in the second quarter compared with $44 million in the previous quarter. Lenvima alliance revenues were $43 million compared with $35 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 $217 million in the quarter, up 17% year over year, driven by strong demand. Sales of Bridion declined sequentially.
Januvia/Janumet (diabetes) franchise sales declined 2% to $1.49 billion due to continued pricing pressure.
In vaccines, Gardasil/Gardasil 9 sales rose 55% to $1.05 billion gaining from easy year-over-year comparisons, commercial launch in China and strong growth in Europe. Proquad, M-M-R II and Varivax vaccines recorded combined sales of $525 million, up 1% year over year.
Meanwhile, pharmaceutical sales were hurt by biosimilar competition for blockbuster drug, Remicade 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 37% to $135 million in the quarter. The Zetia/Vytorin franchise recorded sales of $257 million, down 44% due to loss of exclusivity for both Zetia and Vytorin.
Zepatier brought in sales of $104 million, down 78% year over year on reduction in patient volume due to increasing competition. Management expects the negative trend to continue.
Zostavax vaccine sales declined 77% 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 these competitive pressures, going forward.
Merck’s Animal Health segment generated revenues of $1.02 billion, up 2% (up 6% excluding Fx impact) from the year-ago quarter, driven by higher sales of its companion animal products as well as livestock products, particularly ruminant and poultry products.
Dividend Hike & Authorization of New Buyback Plan
Merck announced a 15% increase in its quarterly dividend from 48 cents to 55 cents per share and also said its board of directors authorized a new share buyback plan of $10 billion, including a $5 billion accelerated repurchase plan.
Merck also raised its planned investments in new capital projects to $16 billion from $12 billion previously.
Merck raised its earnings guidance but slightly narrowed its revenue expectations.
Merck tightened its outlook for 2018 revenues to the range of $42.1 billion – $42.7 billion from $42.0 billion – $42.8 billion. The revenue guidance now includes only a minimal impact from currency fluctuation compared with a slightly positive impact expected previously.
Merck raised its adjusted earnings guidance to the range of $4.30–$4.36 from the previous guidance of $4.22–$4.30. The adjusted earnings guidance still includes approximately 1% negative impact from currency fluctuation.
Adjusted operating expenses are still expected to increase year over year at a low- to mid-single digit rate due to higher R&D costs.
Merck’s third-quarter results were mixed as the company beat estimates for earnings but slightly missed the same for sales. Though it tightened its sales guidance for 2018, it was only due to less favorable currency impact owing to a strengthening dollar. Meanwhile, it raised its expectations for adjusted earnings for the full year.
Shares were up around more than 1% in pre-market trading. So far this year, Merck’s shares have outperformed the industry.
Merck’s shares have risen 25.3% in the period compared with 1.7% increase for the industry.
All eyes were on the performance of Keytruda, which is being touted as a key long-term growth driver for Merck. The drug continued its robust performance on strong demand trends.
Going forward, Merck expects growth from key products like Keytruda, Lynparza, Gardasil, Bridion and Animal Health to make up for headwinds from LOEs, softness in the diabetes franchise, and competitive pressure on Zepatier and Zostavax.
Zacks Rank & Key Pick
Merck currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Lilly’s earnings estimates for 2018 and 2019 have risen 0.9% and 1.6%, respectively over the past 60 days. Its stock has gained 25.9% this year so far.
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