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Can Merck (MRK) Pull Off a Surprise this Earnings Season?

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Merck & Co., Inc. (MRK - Free Report) will be reporting second-quarter 2017 earnings on Jul 28, before market opens. Last quarter, the company delivered a positive earnings surprise of 6.02%.

Merck’s performance has been pretty impressive, with the company exceeding earnings expectations consistently. The average positive earnings surprise over the last four quarters is 4.36%

Merck’s shares rose 6.9% this year so far, comparing unfavourably with 12.1% increase for the industry.

Factors to Consider

Merck’s new products like Keytruda (cancer), Zepatier (HCV) and Bridion (sugammadex) injection may drive the top line this quarter.

We believe Keytruda’s sales will likely be driven by strong uptake, launch in new countries and expansion into additional indications, especially first-line NSCLC. In Mar/Apr 2017, Keytruda received FDA and EU approval for refractory classical Hodgkin lymphoma (cHL) - the first Keytruda approval for hematologic malignancy indication. In May, Keytruda was approved as first-line combination therapy for lung cancer – its first FDA approval as a combination therapy. The expanded indications, especially as a combination therapy, may add to Keytruda’s sales this quarter. This apart, continued strength in melanoma indication and rapid penetration of head and neck cancer indication might boost Keytruda sales.

In the last couple of months, there were a series of regulatory approvals for the label expansion of Keytruda like advanced bladder cancer. We expect an update from management on the commercialization plans for the same at the conference call.

At the first quarter conference call, management had said that it was working on securing reimbursement for Keytruda in first as well as second-line NSCLC indication outside U.S. and lung cancer sales will become a much larger contributor outside the country as the year progresses. We expect an update on this at the conference call.

Meanwhile, ongoing launches globally are likely to support Zepatier’s sales.

However, the company will continue to face headwinds in the form of genericization, increasing competition and the negative impact of currency exchange.

Sales of Remicade (lost exclusivity in Europe and facing stiff biosimilar competition in the region), Nasonex (generic version launched in the U.S. in Mar 2016), Cubicin (lost patent protection in the U.S. in Jun 2016) and Zetia (lost market exclusivity in the U.S. in Dec 2016) will likely decline in the quarter.

Sluggish growth of the integrase class and continued competitor dynamics in the U.S. and Europe may continue to affect Isentress’ sales.

Investors focus will remain on the performance of Merck’s DPP-4 inhibitor – Januvia. Pricing pressure hurt sales of the Januvia/Janumet franchise in the first quarter. It remains to be seen if the trends improved in the second quarter.

The vaccines and animal health franchises should also boost sales this quarter.

Earnings Whispers

Our proven model does not conclusively show that Merck is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Its Earnings ESP is 0.00% as both the Most Accurate estimate as well as the Zacks Consensus Estimate stand at 87 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Merck’s Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the 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

Stocks to Consider

Stocks in the pharmaceuticals sector that also have a positive Earnings ESP and a favorable Zacks Rank are:

Novo Nordisk A/S (NVO - Free Report) , scheduled to release results on Aug 9, has an Earnings ESP of +3.57% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pfizer, Inc. (PFE - Free Report) has an Earnings ESP of +1.54% and a Zacks Rank #3. The company is scheduled to release results on Aug 1.

Vertex Pharmaceuticals Incorporated (VRTX - Free Report) has an Earnings ESP of +66.67% and a Zacks Rank #1. The company is scheduled to release results on Jul 26.

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