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Merck (MRK) Q2 Earnings Coming Up: What's in the Cards?

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Merck & Co., Inc. (MRK - Free Report) will report second-quarter 2018 results on Jul 27, before market open. In the last reported quarter, the company delivered a positive earnings surprise of 6.06%.

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 8.55%

 

Merck & Co., Inc. Price and EPS Surprise

 

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

Merck’s shares have risen 11.4% this year so far against a 1.3% decrease for the industry.

 

Let’s see how things are shaping up for this announcement.

Factors to Consider

Merck’s new products like cancer drugs Keytruda, Lynparza, Gardasil and Bridion Injection should drive the top line this quarter. However, loss of market exclusivity for several drugs, softness in the diabetes (Januvia/Janumet) franchise, and lower sales of key products like Zostavax and Zepatier due to competitive pressure may hurt sales.

Keytruda sales are being driven by the launch of new indications globally. Keytruda sales are gaining particularly from strong momentum in the indication of first-line lung cancer as it is the only anti-PD-1 approved in the first-line setting.

In June, Keytruda gained FDA approval for two new indications. These include third-line treatment of adult as well as pediatric patients with primary mediastinal B-cell lymphoma (PMBCL), a type of non-Hodgkin lymphoma and second-line treatment of recurrent or metastatic cervical cancer. These label expansion approvals should drive sales of Keytruda in the future quarters.

Strong demand in most markets is driving sales of Bridion (sugammadex) Injection – a trend we expect to see in the second-quarter results as well.

Rising competitive pressure is hurting sales of relatively newer drugs like Zostavax and Zepatier. Zepatier sales have declined sequentially in the last two quarters on reduction in patient volume due to increasing competition. On the Q1 call, Merck had warned that the negative trend will continue in 2018 as most markets outside the United States will also come under pressure.

Among the older products, while continued pricing pressure is hurting sales of Januvia, lower demand due to competitive pressure is hurting sales of Isentress.

Among the vaccines, Zostavax sales will continue to be hurt by strong competition from Glaxo’s (GSK - Free Report) newly approved shingles vaccines, Shingrix. Gardasil/Gardasil 9 sales are likely to be driven by a strong performance in outside U.S. markets, which should make up for weaker volumes in the United States due to continued transition to two-dose regimens. It remains to be seen if sales of Gradasil in domestic markets improve in the second quarter. The Zacks Consensus Estimate for total vaccine sales is $1.41 billion.

Animal health franchise sales should remain strong in the second quarter. The Zacks Consensus Estimate for total Animal Health segment sales is $1.08 billion.

While gross margin is likely to be hurt by unfavorable product mix, higher R&D costs will hurt profits.

Earnings Whispers

Our proven model does not conclusively show that Merck will 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.

Earnings ESP: Its Earnings ESP is -1.13% as the Most Accurate estimate stands at $1.02 while the Zacks Consensus Estimate is pegged higher at $1.04. 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 #3 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.

Stocks to Consider

Here are some large biotech/drug stocks worth considering per our model. These have the right combination of elements to beat on earnings this time around:

AbbVie, Inc. (ABBV - Free Report) has an Earnings ESP of +0.15% and a Zacks Rank of 3. The company is scheduled to report second-quarter earnings on Jul 27. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pfizer (PFE - Free Report) is slated to announce financial figures on Jul 31. The company has an Earnings ESP of +0.89% and is also a Zacks #3 Ranked stock.

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