It has been about a month since the last earnings report for Merck (MRK Quick QuoteMRK - Free Report) . Shares have added about 4.2% 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 drivers.

Merck Beats on Q2 Earnings and Sales

Merck reported second-quarter 2019 adjusted earnings of $1.30 per share, which beat the Zacks Consensus Estimate of $1.16 Earnings rose 23% year over year (up 25% excluding the impact of currency) driven by higher revenues.

Including acquisition- and divestiture-related costs, restructuring costs and certain other items, earnings per share were $1.03 compared with 63 cents in the year-ago quarter.

Revenues for the quarter rose 12% year over year to $11.76 billion, beating the Zacks Consensus Estimate of $10.91 billion. Currency movement negatively impacted revenues by 3%. Excluding currency impact, sales rose 15% year over year.

Strength in cancer drug, Keytruda, and Gardasil vaccine and a strong performance in international markets, especially China, offset headwinds from loss of exclusivity (“LOE”) for some products and competitive pressure for the diabetes franchise. Sales in China surged 41% (51% excluding Fx impact) from the year-ago period driven largely by growth in products like Lynparza, Lenvima, Keytruda and Gardasil.

Quarter in Detail

The Pharmaceutical segment generated revenues of $10.46 billion, up 13% (up 17% 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 $2.6 billion in the quarter, up around 15.9% sequentially and 58% year over year (up 63% excluding Fx). Sales were driven by the launch of new indications globally. Keytruda sales are gaining from strong momentum in first-line lung cancer indication and recent launch in newer indications – renal cell carcinoma and adjuvant melanoma.

On the call, the company said that in the United States, the company is firmly establishing as the standard of care for indicated patients in first-line lung cancer. Meanwhile, for recent launches in metastatic renal cell carcinoma and adjuvant melanoma, the company is seeing strong adoption rates among oncologists

In international markets, Merck witnessed strong uptake in first-line lung cancer indication following reimbursement approvals in different EU countries for the chemo combo. In Japan, Keytruda has become the leading PD-L1 inhibitor with approvals for several indications. In China, the recent launch in first-line lung cancer and strong uptake in metastatic melanoma (launched in 2018) led to a strong sales performance in the second quarter.

Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter. Lynparza alliance revenues were $111 million in the quarter compared with $79 million in the previous quarter driven by further uptake in ovarian cancer after approval in first-line maintenance setting in December as well as strength in markets such as Europe, Japan and China. Lenvima alliance revenues were $97 million compared with $74 million in the previous quarter driven by strong performance in hepatocellular cancer in the United States and China and launch in several other markets.

In the hospital specialty portfolio, Bridion (sugammadex) Injection generated sales of $278 million in the quarter, up 16% year over year, driven by strong demand in the United States.

Vaccines sales rose 33% to $2.0 billion in the quarter. In vaccines, Gardasil/Gardasil 9 sales rose 46% year over year to $886 million, gaining from ongoing commercial launch in China and higher demand in Europe. Favorable public sector buying patterns and greater demand in the adolescent cohorts in the United States also boosted sales of the vaccine. Proquad, M-M-R II and Varivax vaccines recorded combined sales of $675 million, up 58% year over year.

Pharmaceutical sales were hurt by biosimilar competition for Remicade in Merck’s marketing territories in Europe and loss of U.S. market exclusivity for Zetia and Vytorin.

Remicade sales declined 37% year over year to $98 million in the quarter. The Zetia/Vytorin franchise recorded sales of $232 million, down 39.1% from the year-ago quarter due to LOE for both Zetia and Vytorin.

Zepatier brought in sales of $108 million, down 5% year over year due to increasing competition.

However, in the cardiovascular franchise, while Adempas sales grew 38.7% to $104 million, Atozet sales were down 8.9% to $92 million.

Januvia/Janumet (diabetes) franchise sales declined 6% year over year to $1.4 billion due to continued pricing pressure in the United States. Sales of Isentress declined 19% to $247 million.

Merck’s Animal Health segment generated revenues of $1.12 billion, up 3% (up 9% excluding Fx impact) from the year-ago quarter, driven by higher sales of its companion animal products as well as livestock products. As expected, Animal Health sales recovered from softer growth in the first quarter. Excluding the impact of exchange, livestock sales grew 13% due to the contributions from the products acquired in the Antelliq acquisition while companion animal sales grew 4% in the quarter.

Margin Discussion

Adjusted gross margin came in at 75.4%, up 100 basis points from the year-ago quarter driven primarily by favorable product mix and lower amortization of collaboration milestone payments.

Selling, general and administrative (SG&A) expenses were $2.62 billion in the reported quarter, up 5.1% year over year driven by higher administrative and promotion costs, partially offset by favorable impact of foreign exchange movement. Research and development (R&D) spend rose 13.3% to $2.18 billion in the quarter due to ongoing clinical studies and cost related to early drug development. Costs related to the business development transactions during the quarter also pulled up the R&D expenses.

In the quarter, Merck was active in business development, announcing acquisitions of Peloton Therapeutics and Tilos Therapeutics during the quarter.

Ups 2019 Guidance

Merck increased its earnings and sales guidance for 2019 for the second time this year.

Merck expects revenues to be in the range of $45.2 billion – $46.2 billion versus previous expectation of $43.9 billion – $45.1 billion. The revenue growth guidance represents 7% to 9% growth from 2018 level versus 4% to 7% growth expected previously. The revenue guidance includes a slightly more than 1% negative impact of currency fluctuation.
 
Adjusted earnings are now expected to be in the range of $4.84–$4.94, much higher than the previously guided range of $4.67–$4.79. The earnings guidance includes a slightly negative impact of currency fluctuation, down from the previous expectation of a slightly positive impact of currency fluctuation. The new earnings guidance range represents growth of approximately 12% to 14% from 2018 levels versus prior expectation of 8% to 10%.

Adjusted operating expenses are expected to increase year over year at mid-single digit rate versus low- to mid-single digit rate expected previously.

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 guidance was maintained in the range of 18.5% - 19.5%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

At this time, Merck has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Merck has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.