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Merck (MRK) Beats on Q1 Earnings & Sales as Keytruda Shines

Zacks Equity Research

Merck & Co., Inc. MRK 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 certain other 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 Janumia and Janumet. Sales in China surged 58% (67% excluding Fx impact) from the year-ago period.

Quarter in Detail

The Pharmaceutical segment generated revenues of $9.66 billion, up 8% (up 12% excluding Fx impact) year over year as higher sales in oncology and vaccines were offset by lower sales in virology. 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 as it is the only anti-PD-1 approved in first-line setting.

Keytruda is already approved for many types of cancers and treatment settings including lung cancer, melanoma, head and neck cancer, classical Hodgkin’s lymphoma and bladder cancer. 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. Lenvima alliance revenues were $74 million compared with $71 million in the previous quarter.

Merck has a deal with Swiss pharma giant AstraZeneca AZN 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 $255 million in the quarter, up 25% year over year, driven by strong demand. Bridion was launched in China in the third quarter, which may have boosted sales this quarter.

In vaccines, Gardasil/Gardasil 9 sales rose 31% 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.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $496 million, up 30% year over year.

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 Zetia and Vytorin.

Remicade sales declined 26% year over year to $123 million in the quarter. Please note that Merck markets Remicade in partnership with J&J JNJ.

The Zetia/Vytorin franchise recorded sales of $238 million, down 50% from the year-ago quarter due to loss of exclusivity for both Zetia and Vytorin. However, Adempas and Atozet posted strong growth, partially offsetting loss of sales in the cardiovascular segment. While Adempas sales grew 33% to $90 million, Atozet sales were up 29% to $94 million. Please note that Adempas is commercialized in collaboration with Bayer BAYRY.

Januvia/Janumet (diabetes) franchise sales declined 5% year over year to $1.35 billion due to continued pricing pressure. Sales of Isentress declined 9% to $255 million.

Merck’s Animal Health segment generated revenues of $1.03 billion, down 4% (up 3% excluding Fx impact) from the year-ago quarter, driven by higher sales of its companion animal products as well as livestock products, particularly swine and poultry products.

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.

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 ongoing clinical studies and cost related to early drug development.

2019 Guidance

Merck revised its earnings and sales guidance for 2019.

Merck expects revenues to be in the range of $43.9 billion – $45.1 billion (previously $43.2 billion – $44.7 billion). The Zacks Consensus Estimate is pegged at $44.31 billion. Adjusted earnings are expected to be in the range of $4.67–$4.79 (previously $4.57–$4.72). The Zacks Consensus Estimate is pegged at $4.65 per share. While the revenue guidance includes a slightly more than 1% negative impact of currency fluctuation, the earnings guidance includes a slightly positive impact.

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

Our Take

Merck’s first-quarter results were strong as the company beat estimates for earnings as well as sales. It raised its earnings expectations for the year, which pushed up shares by more than 1% in pre-market trading. Merck’s shares have outperformed the industry so far this year. It has risen 0.5% in the said time frame against a 1% decrease for the industry.

Importantly, Keytruda continued its robust performance on strong demand trends. Vaccine products also performed strongly and continue to be core growth drivers for Merck.

Going forward, growth from key products like Keytruda, Lynparza, Gardasil, Bridion and Animal Health should make up for headwinds from LOEs, softness in the diabetes franchise, and competitive pressure on Zepatier and Zostavax.

Merck & Co., Inc. Price, Consensus and EPS Surprise


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

Zacks Rank

Merck currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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