Will Merck (MRK) Beat Earnings This Quarter?


Merck & Co. Inc. (MRK) is scheduled to report its second quarter 2013 results on Jul 30, 2013 before the opening bell. 

We remind investors that Merck has delivered positive earnings surprises in the last four quarters with an average beat of 4.39%. Last quarter, the company posted an 8.97% positive surprise. Let’s see how things are shaping up prior to the announcement.

Factors at Play

Although Merck’s first quarter earnings beat expectations, the overall results were disappointing. Merck reduced its outlook for 2013 due to higher-than-expected pressure on sales, higher R&D spend, revised tax rates and unfavorable movements in foreign exchange rates.

With Singulair losing exclusivity in the U.S. as well as the EU, we expect Singulair sales to plummet further in the second quarter.

In addition, the performance of diabetes drug, Januvia, in the U.S. is expected to be weak even though international sales are expected to pick up in 2013. We note that Merck entered into a strategic deal with Pfizer (PFE) for the development and commercialization of the latter’s diabetes candidate ertugliflozin. As per the agreement, the companies are also looking to evaluate fixed dose combinations of ertugliflozin with metformin and Januvia.

Other headwinds remain in the form of unfavorable currency movement and pipeline setbacks.

In May 2013, Merck said that it will not pursue regulatory filings for its Parkinson’s disease candidate, preladenant after unsuccessful phase III trials. Meanwhile, Merck received a complete response letter (CRL) from the U.S. Food and Drug Administration (:FDA) for its insomnia candidate, suvorexant.

Earlier in the month, the FDA cancelled an advisory panel meeting for pipeline candidate sugammadex (neuromuscular reversal agent) leading to a delay in approval.

These challenges should be partially mitigated by the company’s cost-cutting initiatives and share buybacks.

Earnings Whispers?

Our proven model does not conclusively show that Merck will beat earnings this quarter as a stock needs to have both a positive Earnings ESP (Read: Zacks Earnings ESP) and a Zacks Rank #1, #2 or #3 to be able to beat Zacks Consensus Estimates.

That is not the case here as you will see below.

Zacks ESP: The ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00% as the Most Accurate Estimate and the Zacks Consensus Estimate currently stand at 82 cents.

Zacks Rank #3 (Hold): Merck’s Zacks Rank #3 when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Amgen, Inc (AMGN) has Earnings ESP of 1.75% and holds a Zacks Rank #2 (Buy).  

Impax Laboratories Inc. (IPXL) has Earnings ESP of 66.67% and holds a Zacks Rank #3.

Read the Full Research Report on MRK

Read the Full Research Report on PFE

Read the Full Research Report on AMGN

Read the Full Research Report on IPXL

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