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Merck (MRK) Beats on Q4 Earnings, Plans Women Health Spin Off

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Merck & Co., Inc. (MRK - Free Report) reported fourth-quarter 2019 adjusted earnings of $1.16 per share, which beat the Zacks Consensus Estimate of $1.14. Earnings rose 12% year over year.

Including acquisition- and divestiture-related costs, restructuring costs and certain other items, earnings per share were 92 cents, up 33% year over year.

Revenues rose 8% year over year (9% excluding currency impact) to $11.9 billion, which missed the Zacks Consensus Estimate of $12.1 billion.

Along with the earnings release, Merck announced that it will spin off products from its Women’s Health unit, legacy drugs (including Zetia and Vytorin) and biosimilar products into a new publicly traded company.

Quarter in Detail

The Pharmaceutical segment generated revenues of $10.53 billion, up 7% (up 8% excluding Fx impact) year over year as higher sales in oncology and hospital business were offset by lower vaccines and diabetes sales. As in the previous quarters, loss of exclusivity (LOE) for several drugs also hurt the top line.

In October, Merck borrowed doses of Gardasil vaccine from U.S. Centers for Disease Control and Prevention’s (CDC) stockpile to support routine vaccinations in the United States, and to free up some manufacturing capacity to make doses for ex-U.S. markets. The stockpile borrowing hurt fourth-quarter sales by approximately $120 million.

Keytruda, the largest product in Merck’s portfolio, generated sales of $3.1 billion in the quarter, up 45% year over year. Sales were driven by the launch of new indications globally. Keytruda sales are gaining particularly from continued strong momentum in first-line lung cancer indication and launch in newer indications namely renal cell carcinoma and adjuvant melanoma. However, sales of Keytruda fell short of the Zacks Consensus Estimate of $3.2 billion.

In the fourth quarter, Keytruda gained approvals in China for two non-small cell lung cancer indications and in Europe for first-line head/neck cancer. Last month, Keytruda was approved by the FDA to treat patients with high-risk non-muscle invasive bladder cancer (NMIBC), unresponsive to Bacillus Calmette-Guerin (BCG) — a therapy widely used in the management of bladder cancer.

Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter.

Lynparza alliance revenues were $132 million in the quarter compared with $123 million in the previous quarter. Lenvima alliance revenues were $124 million compared with $109 million in the previous quarter.

Merck has a deal with Swiss pharma giant AstraZeneca (AZN - Free Report) to co-develop and commercialize PARP inhibitor Lynparza and a similar one with Japan’s Eisai for tyrosine kinase inhibitor, Lenvima.

In the hospital specialty portfolio, Bridion (sugammadex) Injection generated sales of $313 million in the quarter, up 22% year over year, driven by strong demand in the United States.

In vaccines, Gardasil/Gardasil 9 sales declined 17% year over year to $693 million hurt by the stockpile borrowing discussed above. Gardasil/Gardasil 9 sales fell significantly below the Zacks Consensus Estimate of $979 million. Excluding the impact of stockpile borrowing, Gardasil/Gardasil 9 sales rose 15% in the quarter.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $481 million, up 6% year over year. Pneumovax 23 and Rotateq vaccines rose 4% to $334 million and 21% to $227 million, respectively.

Pharmaceutical sales were hurt by generic competition for blockbuster drug, Remicade in Merck’s marketing territories in Europe and loss of U.S. market exclusivity for Noxafil, Emend, Cubicin, Zetia and Vytorin. Also, a generic version of NuvaRing was launched in the United States, which hurt sales of the drug in the quarter.

Remicade sales declined 27% year over year to $89 million in the quarter. Please note that Merck markets Remicade in partnership with J&J (JNJ - Free Report) .

Zetia and Vytorin recorded sales of $146 million and $54 million, down 9% and 35%, respectively from the year-ago quarter due to LOE for both drugs.

Januvia/Janumet (diabetes) franchise sales declined 3% year over year to $1.42 billion due to continued pricing pressure in the United States. Sales of Isentress declined 20% to $223 million.

Merck’s Animal Health segment generated revenues of $1.12 billion, up 8% (up 10% excluding Fx impact) from the year-ago quarter, driven by higher sales of its livestock products, particularly products added from the acquisition of Antelliq.

Margin Discussion

Adjusted gross margin was 72.6%, down 240 basis points from the year-ago quarter due to unfavorable manufacturing variances and the negative impact of pricing pressure.

Selling, general and administrative (SG&A) expenses were $2.8 billion in the reported quarter, up 8% 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 12% to $2.4 billion in the quarter due to ongoing clinical studies and cost related to early drug development.

2019 Results

Full-year 2019 sales rose 11% to $46.84 billion, missing the Zacks Consensus Estimate of $47.0 billion. However, sales were within the guided range of $46.5 billion – $47 billion.

Adjusted earnings of $5.19 per share beat Zacks Consensus Estimate of $5.16 and came ahead of the guided range of $5.12–$5.17. Earnings rose 20% year over year.

Issues 2020 Outlook

Merck expects revenues to be in the range of $48.8 billion – $50.3 billion including a negative currency impact of less than 1%. The Zacks Consensus Estimate stands at $49.8 billion.

Adjusted earnings are expected to be in the range of $5.62–$5.77, including a negative currency impact of approximately 1.5%. The Zacks Consensus Estimate is pegged at $5.54.

The company expects adjusted operating expenses to increase year over year at low-single digit rate.

Merck had stated last year that it expects revenues in 2020 to be hurt by increased pricing pressure, moderated growth rates for Gardasil and potential generic erosion of Noxafil and NuvaRing.

Details of Spin-Off

Merck expects the spin off to help it achieve more than $1.5 billion in operating efficiencies by 2024 by reducing its manufacturing footprint for pharmaceutical drugs by 25%. Accordingly, Merck expects to achieve operating margins greater than 40% in 2024. The new company is expected to comprise Merck’s total revenue of approximately $6.5 billion in 2020. Moreover, Merck expects to receive $8 billion to $9 billion through a special tax-free dividend from the spin-off. The transaction is expected to be completed by the first half of 2021.

Our Take

Merck’s fourth-quarter results were mixed as the company beat estimates for earnings but missed the same for sales. Keytruda continued its robust performance on strong demand trends and label expansions. Gardasil/Gardasil 9 sales, however, disappointed in the quarter

In a surprising move, the company revealed plans to spin off its women's healthcare unit, biosimilar drugs and legacy products to allow it to focus on its core areas, oncology, vaccines, hospital and animal health. Shares were down 2.3% in pre-market trading.

Merck’s shares have risen 14.2% in the past year compared with 11.7% increase for the industry.

 

 

Zacks Rank

Merck currently carries a Zacks Rank #3 (Hold). A better-ranked large-cap pharma stock is Sanofi (SNY - Free Report) with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sanofi’s earnings estimates have increased 1.2% for 2020 over the past 60 days.

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