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Merck's New Drugs, Cost Management to Fuel Growth in 2017

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On Nov 24, we issued an updated report on Merck & Co., Inc. (MRK - Free Report) .

On Oct 25, Merck reported results for the third quarter of 2016, wherein both earnings and revenues beat estimates. The top line also improved year over year on the back of additional sales in Japan which was driven by the timing of shipments before the implementation of a resource planning system in the following quarter. Higher-than-expected sales of Gardasil and delayed entry of Cubicin generics in the quarter also added to sales. Importantly, the leading drug maker Merck raised both its sales and earnings outlook for the year.

Merck is striving to bring new products to market. New products, especially Keytruda, is expected to contribute to the top line. The latest FDA approval of Keytruda for the first-line treatment of metastatic lung cancer should drive the drug’s sales. Keytruda is the first anti-PD-1 therapy to gain FDA approval and is being studied for more than 30 types of cancer.

Moreover, Merck’s progress on its pipeline has been quite impressive. The company has an impressive number of late-stage candidates targeting multiple disease areas such as atherosclerosis, cancer, diabetes and cardiovascular diseases. It has more than 10 candidates in phase III development alone. A few important ones among them are MK-0859 (anacetrapib – cholesterol management), verubecestat (Alzheimer’s disease), MK-8228 (letermovir – cytomegalovirus infections) and MK-8835 (ertugliflozin – type II diabetes).

Merck is also focused on controlling its costs. The company generated net cost savings of more than $2.5 billion in 2015 primarily by reducing marketing and administrative and R&D expenses.

A global restructuring program is in place which is aimed at reducing the cost structure and increasing efficiency. It intends to reduce the number of manufacturing sites, including animal health sites, and consolidate other facilities. The company expects annual savings of about $4.0−$4.6 billion once the restructuring program is complete.

On the flip side, generic competition and pricing pressure continue to dampen the top line. Nasonex and Cubicin lost patent exclusivity in 2016. Meanwhile, key drug, Remicade continues to be affected by biosimilar competition with biosimilars benefiting from increased new patient starts as well as patient switching. Remicade sales are expected to continue due to competitive pressures and also increased switching.

In addition to the impact of genericization of several products, Isentress is being hit by stiff competition and sluggish growth of the integrase class.

Zacks Rank & Key Picks

Merck currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the health care sector include Cambrex Corporation , Heska Corporation and Vanda Pharmaceuticals, Inc. (VNDA - Free Report) . Each of these stocks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cambrex’s earnings estimates increased from $2.46 to $2.55 for 2016 and from $2.91 to $3.06 for 2017 over the last 60 days. The company posted a positive earnings surprise in three of the four trailing quarters with an average beat of 19.78%. Its share price has increased 5.8% year to date.

Heska’s earnings estimates have increased from $1.13 to $1.35 for 2016 and from $1.38 to $1.53 for 2017 over the last 60 days. The company posted a positive earnings surprise in all of the four trailing quarters with an average beat of 301.64%. Its share price has surged 71.9% year to date.

Vanda’s loss estimates narrowed from 68 cents to 56 cents for 2016, while its earnings estimates have increased from 16 cents to 17 cents for 2017 over the last 60 days. The company posted a positive earnings surprise in three of the four trailing quarters with an average positive surprise of 56.65%. Its share price has surged 86.4% year to date.

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