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Merck (MRK) Beats on Q2 Earnings & Sales, Raises '19 View

Zacks Equity Research

Merck & Co., Inc. MRK 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)

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 including Zetia and Vytorin, and competitive pressure for Janumia and Janumet. Sales in China surged 41% (51% excluding Fx impact) from the year-ago period.

Quarter in Detail

The Pharmaceutical segment generated revenues of $10.46 billion, up 13% (up 17% 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, LOE 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. Sales were driven by the launch of new indications globally. Keytruda sales are gaining particularly from strong momentum in first-line lung cancer indication and launch in newer indications – renal cell carcinoma and adjuvant melanoma.

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. In June, the FDA approved two label expansions of the drug — first-line treatment of head and neck squamous cell carcinoma and small cell lung cancer in third-line setting.

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. Lenvima alliance revenues were $97 million compared with $74 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 $278 million in the quarter, up 16% year over year, driven by strong demand in the United States.

In vaccines, Gardasil/Gardasil 9 sales rose 46% year over year to $886 million, gaining from ongoing commercial launch in China and strong growth in Europe. Favorable public sector buying patterns, and positive demand and pricing 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. Sales were driven by higher demand in Europe, favorable pricing in the United States and government orders from Latin America.

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 37.6% year over year to $98 million in the quarter. Please note that Merck markets Remicade in partnership with J&J JNJ.

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. While Adempas sales grew 38.7% to $104 million, Atozet sales were down 8.9% to $92 million. Strong growth in Adempas’ sales partially offset loss of sales in the cardiovascular segment. Please note that Adempas is commercialized in collaboration with Bayer BAYRY.

Januvia/Janumet (diabetes) franchise sales declined 6% year over year to $1.4 billion due to continued pricing pressure in the United States, which was completely offset by higher sales in ex-U.S. markets. 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, particularly products added from Antelliq acquisition.

Adjusted gross margin came in at 75.4%, up 100 basis points from the year-ago quarter driven primarily by favorable product mix.

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.

2019 Guidance Up

Merck increased its earnings and sales guidance for 2019.

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 Zacks Consensus Estimate is pegged at $44.63 billion. 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 Zacks Consensus Estimate is pegged at $4.74 per share. The revenue guidance includes a slightly more than 1% negative impact of currency fluctuation.

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

Our Take

Merck’s second-quarter results were strong as the company beat estimates for earnings as well as sales. It raised its earnings expectations for the year for the second consecutive quarter. Shares were up by more than 3% in pre-market trading. Merck’s shares have outperformed the industry so far this year. It has risen 7.9% in the said time frame while the industry recorded no movement.

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

Going forward, growth of key products like Keytruda, Lynparza, Gardasil, Bridion and Animal Health should continue to make up for the headwinds from LOE, 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. price-consensus-eps-surprise-chart | 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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