It has been about a month since the last earnings report for Merck (MRK - Free Report) . Shares have added about 0.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Merck due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Merck Beats on Q1 Earnings and Sales
Merck reported first-quarter 2019 adjusted earnings of $1.22 per share, which beat the Zacks Consensus Estimate of $1.05. Earnings rose 16% year over year (up 18% excluding the impact of currency).
Including acquisition and divestiture-related costs, restructuring costs and other one-time items, earnings per share were $1.12 against a loss of 27 cents in the year-ago quarter.
Revenues for the quarter rose 8% year over year to $10.8 billion, beating the Zacks Consensus Estimate of $10.32 billion. Currency movement negatively impacted revenues by 3%. Excluding currency impact, sales rose 11% year over year.
Strength in cancer drug, Keytruda, and Gardasil vaccine and strong performance in international markets, especially China, offset headwinds from loss of exclusivity (“LOE”) for some products including Zetia and Vytorin, and competitive pressure for the diabetes franchise. Sales in China surged 58% (67% excluding Fx impact) from the year-ago period driven largely by newly launched products.
Quarter in Detail
The Pharmaceutical segment generated revenues of $9.66 billion, up 8% (up 12% excluding Fx impact) year over year driven by higher sales in oncology and vaccines. As in the previous quarters, loss of market exclusivity for several drugs hurt the top line
Keytruda, the largest product in Merck’s portfolio, generated sales of $2.27 billion in the quarter, up around 5.6% sequentially and 55% 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 both as monotherapy and with the rollout of the chemo combo in both non-squamous and squamous NSCLC.
On the call, the company said that while globally, sales are led by the lung cancer indication, other indications, including head and neck, bladder and microsatellite instability-high cancer, are also seeing strong utilization rates.
In international markets, Merck witnessed strong uptake in first-line lung cancer indication mostly due to further uptake of the monotherapy indication and PD-L1 high expressors following reimbursement approvals in different countries. In Europe, the company said that the uptake for the non-squamous lung cancer patients (after approval to include KEYNOTE-189 study data on the label in September 2018) was strong. In Japan, sales accelerated in the quarter given the recent approvals across five indications. In China, the launch in metastatic melanoma in 2018 led to a strong sales performance in the first quarter.
Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter. Lynparza alliance revenues were $79 million in the quarter compared with $62 million in the previous quarter driven by further uptake in ovarian cancer after approval in first-line maintenance setting in December as well as launches in new markets such as Japan and China. Lenvima alliance revenues were $74 million compared with $71 million in the previous quarter driven by strong performance in hepatocellular cancer, following recent launches in the United States, Europe and more recently China.
In the hospital specialty portfolio, Bridion (sugammadex) Injection generated sales of $255 million in the quarter, up 25% year over year, driven by strong demand. The ongoing launch of Prevymis also boosted sales in the hospital acute care segment.
In vaccines, Gardasil/Gardasil 9 sales rose 27% year over year to $838 million, gaining from ongoing commercial launch in China and strong growth in Europe, partially offset by lower sales in the United States reflecting unfavorable public sector buying patterns.
Proquad, M-M-R II and Varivax vaccines recorded combined sales of $496 million, up 27% year over year.
Pharmaceutical sales were hurt by biosimilar competition for blockbuster drug, Remicade in Merck’s marketing territories in Europe and loss of U.S. market exclusivity for Zetia and Vytorin. Sales of Zepatier also declined in the quarter.
Remicade sales declined 26% year over year to $123 million in the quarter. The Zetia/Vytorin franchise recorded sales of $238 million, down 47% from the year-ago quarter due to loss of exclusivity for both Zetia and Vytorin.
Zepatier brought in sales of $114 million, down 13% year over year due to increasing competition.
However, in the cardiovascular franchise, Adempas and Atozet posted strong growth. While Adempas sales grew 33% to $90 million, Atozet sales were up 29% to $94 million.
Januvia/Janumet (diabetes) franchise sales declined 5% year over year to $1.35 billion due to continued pricing pressure in the United States. Sales of Isentress declined 9% to $255 million.
Merck’s Animal Health segment generated revenues of $1.03 billion, down 4% from the year-ago quarter due to currency headwinds. Excluding Fx impact, sales rose 3% as higher sales of swine and poultry products and Bravecto (fluralaner) line of products for parasitic control were offset by lower ruminant product sales. Excluding the impact of exchange, livestock sales grew 1% while companion animal sales grew 6% in the quarter.
On the call, the company said that while Animal Health growth in the first quarter was light, it is expected to recover with the full-year performance again outpacing the overall market.
Adjusted gross margin came in at 75.9%, up 20 basis points (bps) from the year-ago quarter driven primarily by favorable product mix, which offset unfavorable effects of pricing pressure, higher royalty payments and amortization of collaboration milestone payments.
Selling, general and administrative (SG&A) expenses were $2.43 billion in the reported quarter, down 2.9% year over year. Research and development (R&D) spend rose 9.4% to $1.96 billion in the quarter due to increased clinical development spending, including collaborations, as well as discovery and early development efforts.
Merck raised its earnings and sales guidance for 2019 driven by its strong operational performance.
Merck expects revenues to be in the range of $43.9 billion – $45.1 billion versus $43.2 billion – $44.7 billion previously. The revenue growth guidance represents 4% to 7% growth from 2018 level. The revenue guidance includes a slightly more than 1% negative impact of currency fluctuation which is slightly above the previous guidance of approximately 1% negative impact.
Adjusted earnings are expected to be in the range of $4.67–$4.79 versus previous expectations of $4.57–$4.72. The earnings guidance includes a slightly positive impact of currency fluctuation, down from the previous expectation of approximately 1% positive impact. The new earnings guidance range represents growth of approximately 8% to 10% from 2018 levels.
Adjusted operating expenses are expected to increase year over year at a low- to mid-single digit rate.
Going forward, growth from key products like Keytruda, Lynparza, Gardasil, Bridion and Animal Health should make up for headwinds from LOEs, currency, pricing pressure in the diabetes franchise, and competitive pressure on Zepatier and Zostavax.
Adjusted gross margin is expected to be roughly flat year over year as an improved product mix will be offset by headwinds like lower prices, royalty payments, currency fluctuations and the continued amortization of collaboration milestones.
Adjusted tax rate is expected to be between 18.5% and 19.5%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, Merck has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision indicates a downward shift. It comes with little surprise Merck has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.