Merck (MRK) Down 9.2% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Merck & Company, Inc. MRK. Shares have lost about 9.2% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to its next earnings release, or is MRK due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Merck Beats on Q4 Earnings, Lags Sales

Merck reported fourth-quarter 2017 adjusted earnings of 98 cents per share, which beat the Zacks Consensus Estimate of 94 cents by 4.3%. Earnings rose 10.1% year over year as slightly higher sales, and lower taxes made up for higher R&D costs in the quarter.

Including a $2.6 billion provision related to U.S. tax reform, fourth-quarter 2017 loss per share was 32 cents compared with a loss of 22 cents per share in the fourth quarter of 2016.

Revenues for the quarter rose 3% year over year to $10.43 billion. Sales, however, slightly missed the Zacks Consensus Estimate of $10.45 billion. Currency movement positively impacted revenues by 1%. Excluding currency impact, sales rose 2% year over year.

Strength in Keytruda, Bridion and Animal Health offset headwinds from loss of exclusivity for some products, competitive pressure for Zostavax and Zepatier and lost sales (approximately $125 million) in some markets due to a network cyber-attack in June.

Revenues in the quarter were also boosted by several one-time events. Sales from the terminated vaccine joint venture with Sanofi in Europe (approximately $140 million), favorable timing of shipments in Japan in 2016 (approximately $150 million) and partial replenishment of borrowed doses of Gardasil/Gardasil 9 into the U.S. Centers for Disease Control and Prevention’s (CDC) stockpile ($115 million) contributed to overall sales.

Quarter in Detail

The Pharmaceutical segment generated revenues of $9.29 billion, up 4% (up 3% excluding Fx impact) year over year as continued strong sales of Keytruda and Bridion offset lower sales of key vaccines - Gardasil/Gardasil 9 and Zostavax in the United States. As in the previous quarters, loss of market exclusivity for several drugs also hurt the top line.

Keytruda, the second-largest product in the Merck portfolio, brought in sales of $1.3 billion in fourth-quarter 2017, up 23.5% sequentially and 169% year over year. Sales continued to be driven by the launch of new 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.

The Keytruda development program also significantly advanced in 2017 with regulatory approvals for six new indications in the United States, four in Europe and three in Japan. The approvals expanded the patient population, driving sales higher.

Zepatier brought in sales of $296 million, down from $468 million in the previous quarter due to reduction in share and volume due to increasing competition. Management expects the negative trend to continue in 2018 as most markets outside of the United States also come under pressure in 2018.

Bridion (sugammadex) Injection generated sales of $209 million in the quarter, up 50% year over year, driven by strong demand.

Meanwhile, combined sales of Remicade (lost exclusivity in Europe and facing stiff biosimilar competition in the region), Cancidas (lost exclusivity in Europe in 2017), Zetia (lost market exclusivity in the United States in December 2016) and Vytorin (lost U.S. exclusivity in April 2017) declined $500 million in the quarter.

Remicade sales declined 31% to $186 million in the quarter. Cancidas sales plunged 37% to $95 million in the quarter. The Zetia/Vytorin franchise recorded sales of $509 million, down 42% due to loss of exclusivity for both Zetia and Vytorin.

Sales of Isentress also declined while the Januvia/Janumet (diabetes) franchise remained soft in the quarter.

Isentress sales declined 9% in the quarter to 308 million. Lower volumes/demand due to competitive pressure hurt sales of Isentress.

The Januvia/Janumet franchise recorded sales of $1.52 billion in the quarter, up 1% from the year-ago quarter as higher global volumes partially offset the impact of continued pricing pressure.

Gardasil/Gardasil 9 sales rose 17% to $633 million as lower sales in the United States were offset by commercial launch in China and strong growth in Europe. Unfavorable timing of public sector purchases adversely impacted Gardasil’s sales in the United States. Nonetheless, Merck said that underlying growth and increased coverage rates remained strong in the United States. Sales rose in Europe boosted by the addition of sales from the terminated vaccine joint venture with Sanofi.

Zostavax sales declined 45% to $121 million in the quarter as it faced strong competition from Glaxo’s newly approved shingles vaccines, Shingrix.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $403 million, flat year over year.

Merck’s Animal Health segment generated revenues of $981 million, up 11% (up 8% excluding Fx impact) from the year-ago quarter, driven by continued strength in its companion animal, ruminants and poultry businesses.

Margin Discussion

Adjusted gross margin came in at 74.6%, down 20 basis points (bps) from the year-ago quarter.

Marketing and administrative (M&A) expenses were flat at $2.6 billion in the reported quarter. Research and development (R&D) spend increased 18% to $2.1 billion in the quarter due to increased clinical development spending and timing of business development expenses.

2017 Results

Full-year 2017 sales of $40.12 billion missed the Zacks Consensus Estimate of $40.23 billion. Revenues were within the guidance range of $40.0 billion – $40.5 billion. Sales rose 1% year over year.

Adjusted earnings for 2017 were $3.98 per share, which beat the Zacks Consensus Estimate of $3.95 as well as the guided range of $3.91–$3.97. Earnings rose 5.3% year over year.

2018 Guidance

Revenues are expected in the range of $41.2 billion – $42.7 billion in 2018. The revenue guidance includes approximately 1% positive impact from currency fluctuation.

In 2018, Merck expects growth from key products like Keytruda, Lynparza, Gardasil and Bridion to make up for headwinds from LOEs, softness in the diabetes franchise, and competitive pressure on Zepatier and Zostavax.

The company expects adjusted earnings in the range of $4.08–$4.23. The adjusted earnings guidance includes approximately 1% negative impact from currency fluctuation.

Adjusted operating expenses are expected to increase year over year at a low- to mid-single digit rate due to higher R&D costs.

Adjusted gross margin is expected to decline slightly in 2018 due to unfavorable product mix.

Adjusted tax rate is expected to be between 19% and 20% in 2018, flat to a slight up from 2017 levels due to some one-time benefits last year.

Impact of Tax Reforms

Merck also said that on expectation of an improved cash position following the tax reform, it plans to invest approximately $12 billion over the next five years in capital expenditures. Approximately $8 million of this investment will be made to add manufacturing capacity in the United States. Also, the company said it has already made a contribution to the Merck Foundation and plans to award eligible non-executive employees with a one-time, long-term incentive in the second quarter.
 

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.

Merck & Company, Inc. Price and Consensus

Merck & Company, Inc. Price and Consensus | Merck & Company, Inc. Quote

VGM Scores

At this time, MRK has an average Growth Score of C, however its Momentum is doing a lot better with an B. The stock was also allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum and value investors than growth investors.

Outlook

MRK has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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