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Merck vs. Sanofi: Which Stock is a Better Pick Post Q1 Earnings?

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With first quarter earnings season drawing to a close, here is a look at the performance of a couple of top-ranked large cap pharma stocks, Merck & Co., Inc. (MRK - Free Report) and Sanofi (SNY - Free Report) , and what lies ahead for the remainder of the year.

An In-Depth Look at 1Q17 Results: Both Merck and Sanofi surpassed earnings expectations though Sanofi’s sales fell slightly short of estimates while Merck topped sales estimates as well. Despite the presence of generic competition for drugs like Zetia, Cubicin and Nasonex in the U.S. and Remicade in Europe, Merck’s oncology, vaccines and animal health segments helped drive growth in the quarter. Anti-PD-1 therapy, Keytruda, benefited from its launch in the first-line lung cancer setting as well as rapid penetration of head and neck cancer and continued strength in melanoma.

Four of Sanofi’s five key business units recorded growth while headwinds existed in the form of the loss of contribution from the Animal Health segment and a higher tax rate. The company’s multiple sclerosis (MS) franchise is doing well and annualizing at €2 billion in sales. Vaccines benefited from strong pediatric combination sales.

Meanwhile, Diabetes and Cardiovascular unit sales continued to decline. PCSK9 inhibitor, Praluent, continued to be impacted by the challenging payer environment.

2017 Outlook: Following the release of strong 1Q results, Merck raised its revenue and earnings outlook for the year. The base business, including vaccines and animal health as well as contribution from new products like Keytruda should help lessen the impact of genericization. Merck is also exploring business development opportunities that will boost its portfolio, with an emphasis on early to mid-stage pipeline assets.

Sanofi, on the other hand, maintained its outlook for the year. The company expects earnings to be stable to down 3% (at constant exchange rates) in 2017. The sales decline in the U.S. diabetes segment is expected to speed up over the remainder of the year given the challenging payer environment in the country. The segment will feel an incremental effect from the CVS formulary exclusion in the second quarter and the United Health formulary exclusion effective from Apr 1. The company said that Diabetes sales are likely to come in below the minus 4 to minus 8% guidance range.

Pipeline Catalysts: For any pharma or biotech company, the pipeline is of utmost importance and plays an important role in investment decisions. So, it always makes sense to take a look at a company’s pipeline and upcoming catalysts.

Both Merck and Sanofi have several pipeline catalysts lined up this year. Merck has been working on expanding Keytruda’s label into additional indications and has already scored some approvals so far in 2017 that should drive sales going forward. Meanwhile, Merck has several late-stage candidates in its pipeline addressing a wide range of diseases including Alzheimer’s disease, atherosclerosis, bacterial infection, cancer, diabetes, Ebola, heart failure, and HIV among others. Regulatory decisions this year include for label expansions of Keytruda and medicines containing ertugliflozin, an investigational SGLT2 inhibitor for type II diabetes.

Sanofi has also been very busy on the R&D front with proof of concept and phase III studies covering therapeutic areas like cancer, diabetes, hemophilia, Pompe, asthma and multiple sclerosis among others. Dupixent, which is being positioned by the company as a “pipeline in a product”, is expected to move into a phase III study in children with asthma in the second quarter while results from a late-stage study in adults are expected in the fourth quarter. An atopic dermatitis study in children (6-11) is slated to commence in the third quarter.  

A key regulatory event for Sanofi is a decision from the FDA regarding the approval status of experimental rheumatoid arthritis (RA) drug Kevzara (sarilumab), which has blockbuster potential. A response is expected today.

Estimate Revisions: While 2017 earnings estimates for Merck are up 0.5% over the last 30 days, Sanofi witnessed a 0.3% downward revision in earnings estimates for the year.

Price and Valuation Perspective: A look at Sanofi’s year-to-date (YTD) price performance shows that the company has outperformed the S&P 500 as well as the Zacks categorized Large Cap Pharmaceuticals industry -- Sanofi is up 21.9% YTD compared to the industry gain of 8.6%.

Merck has also performed better than the overall market with shares gaining 8.3% YTD.

Going by the current price-to-earnings multiple, which is often used to value drug stocks, Sanofi is trading at a P/E multiple of 15.7, below the S&P 500 P/E multiple of 18.1. Merck is also trading at a similar level given its P/E multiple of 15.9.

Bottom Line

At present, Merck looks like the better pick to us. Although the company does have challenges in the form of generic competition, new products like Keytruda and the strong performance of the base business should provide support. Merck also has a deep pipeline which bodes well for long-term growth.

While Sanofi started the year on the right note beating earnings estimates, sales fell short. Moreover, the diabetes segment remains under pressure. The Praluent injunction litigation appeal also remains an overhang.

Merck and Sanofi are both Zacks Rank #2 (Buy) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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