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Can Keytruda Drive Merck's (MRK) Q1 Earnings and Sales?

Zacks Equity Research

Merck & Co., Inc. MRK will report first-quarter 2019 results on Apr 30 before market open. In the last reported quarter, the company delivered a positive earnings surprise of 0.97%.

Merck’s performance has been pretty impressive, with the company exceeding earnings expectations in all the trailing four quarters. The average positive earnings surprise was 3.13%.

Merck & Co., Inc. Price and EPS Surprise

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

Merck’s shares have declined 2.2% in the year so far against 2.6% decrease for the industry.

 

 

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

Factors to Consider

Merck’s new products like cancer drug Keytruda, Gardasil vaccine and Bridion injection should continue to drive the top line in the to-be reported quarter driven by strong demand trends. Alliance revenues from Lynparza and Lenvima should also boost oncology sales.

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 should once again be driven by the launch of 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 certain patients both as a monotherapy as well as combination therapy.

Following approval to include data from KEYNOTE-407 study in October 2018, the company witnessed strong uptake in squamous non-small cell lung cancer in the United States in the fourth quarter of 2018. In March, European Commission granted marketing approval to Keytruda for the same indication. In fact, in the first quarter, Keytruda was approved by the FDA as an adjuvant therapy for high-risk stage III melanoma and for five new cancer line extensions in Japan. All these label expansion approvals should drive sales of Keytruda higher in the first quarter.

Strong demand in most markets has been boosting sales of Bridion (sugammadex) Injection – a trend we expect to see in the first-quarter results as well. Commercial launch in China and strong growth in Europe and the United States should drive sales of Gardasil/Gardasil 9 vaccine.

Rising competitive pressure is hurting sales of relatively newer drugs like Zostavax and Zepatier. Zepatier sales are going down sharply due to reduction in patient volume as a result of increasing competition. Zostavax sales are expected to be hurt by strong competition from Glaxo’s GSK newly approved shingles vaccines, Shingrix. Among the older products, while continued pricing pressure is hurting sales of the diabetes franchise (Januvia/Janumet), lower demand in the United States and competitive pricing pressure in Europe is hurting sales of Isentress. Remicade sales are expected to decline due to biosimilar competition in EU. Merck markets Remicade in partnership with J&J JNJ.

Animal health franchise sales should remain strong in the first quarter.

Higher R&D costs are expected to hurt profits due to increased clinical development

We expect investor questions on how Merck plans to integrate the small cancer focused biotech, Immune Design which it acquired for $5.85 per share in cash for an approximate value of $300 million this month.

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 -0.16% as the Zacks Consensus Estimate stands at $1.05 per share and the Most Accurate Estimate is pegged 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 #2 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 drug stocks that have the right combination of elements to beat on earnings this time around:

Allergan plc. AGN has an Earnings ESP of +0.73% and a Zacks Rank #3. The company is slated to release results on May 7. You can see the complete list of today’s Zacks #1 Rank stocks here.

GlaxoSmithKline has an Earnings ESP of +1.27% and a Zacks Rank #3. The company is slated to release results on May 1.

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