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Merck (MRK) Q1 Earnings & Sales Miss, COVID-19 Hurts Vaccines

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Merck & Co., Inc. MRK reported first-quarter 2021 adjusted earnings of $1.40 per share, which missed the Zacks Consensus Estimate of $1.63. Earnings declined 7% year over year (down 9% excluding the impact of currency) due to lower revenues and higher operating costs.

Including acquisition- and divestiture-related costs, restructuring costs, income and losses from investments in equity securities and certain other items, earnings per share were $1.25, down 1% year over year (down 3% excluding the impact of currency).

Revenues were flat year over year (down 1% on a constant currency basis) at $12.08 billion mainly as the pandemic hurt demand for its drugs. Sales missed the Zacks Consensus Estimate of $12.846 billion.

Quarter in Detail

The Pharmaceutical segment generated revenues of $10.68 billion, flat year over year. Excluding Fx impact, sales declined 3% due to the negative impact of the COVID-19 pandemic and generic competition for legacy drugs. COVID-19 related business disruptions hurt Merck’s first-quarter pharmaceuticals revenues by $600 million, mostly vaccines.

Keytruda, the largest product in Merck’s portfolio, generated sales of $3.9 billion in the quarter, up 16% (excluding Fx impact) year over year. Keytruda sales have been gaining particularly from continued strong momentum in lung cancer indications and continued uptake in newer indications. However, the impact of COVID-19 (which lowered new patient starts) and pricing pressure in Europe and Japan offset the growth to an extent.

Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter. Merck has a deal with British 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.

Lynparza alliance revenues increased 51% year over year to $228 million in the quarter. Lenvima alliance revenues were $130 million, down 1% from the year-ago period.

In the hospital specialty portfolio, Bridion Injection generated sales of $340 million in the quarter, up 11% year over year, reflecting higher demand.

In vaccines, reduced patient access to doctors and prioritization of COVID-19 vaccines hurt sales of Merck’s vaccines in the quarter.

Sales of HPV vaccine, Gardasil/Gardasil 9 declined 20% year over year to $917.0 million hurt by unfavorable buying patterns in the United States and the unfavorable timing of shipments in China. The pandemic also hurt sales of the vaccines, mainly in the United States and Europe. The company said it plans to re-allocate doses of Gardasil to markets outside the United States to make up for lower demand in the domestic market due to the pandemic.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $449 million, up 2% year over year. Sales of rotavirus vaccine, Rotateq declined 29% to $158 million. Sales of pneumococcal vaccine, Pneumovax 23 vaccine declined 36% at $171 million due to lower demand amid the pandemic, which offset the impact of higher volumes in international market.

Januvia/Janumet (diabetes) franchise sales declined 2% year over year to $1.3 billion.

Pharmaceutical sales were hurt by loss of U.S. market exclusivity for drugs like Noxafil and Zetia. Zetia sales declined 41% to $92 million in the quarter while Noxafil sales declined 32% to $67 million. Remicade sales declined 9% year over year to $85 million in the quarter. Merck markets Remicade in partnership with J&J JNJ.

Merck’s Animal Health segment generated revenues of $1.42 billion, up 17% from the year-ago quarter. Excluding the impact of currency, sales rose 15% helped by higher demand for companion animal products as well as higher sales of companion animal vaccines and higher demand in international markets for livestock products.

Margin Discussion

Adjusted gross margin was 75.7%, down 80 basis points from the year-ago quarter due to pricing pressure, which offset the favorable impact of product mix

Selling, general and administrative (SG&A) expenses were $2.4 billion in the reported quarter, up 6% year over year driven by higher promotion and administrative costs which offset the impact of lower selling costs due to the pandemic. Research and development (R&D) spend rose 13% to $2.4 billion due to higher clinical development costs for COVID-19 programs and increased investment in discovery research and early drug development.

Maintains 2021 Outlook

Merck maintained its previously issued financial guidance for 2021.

In 2021, Merck expects revenues to be in the range of $51.8 billion-$53.8 billion, which indicates growth of 8% to 12% from 2020. This includes a positive currency impact of less than 2%.

Adjusted earnings are still expected to be in the range of $6.48-$6.68. This includes a positive currency impact of less than 3%.

Adjusted operating costs are expected to be higher than 2020 by a mid-to-high-single-digit rate.

Merck is due to spin off its Women’s Health unit, legacy drugs and biosimilar products into a new publicly traded company called Organon & Co. The transaction is expected to occur on Jun 2. The guidance assumes that Organon business will be part of Merck through 2021. Once the spin-off is completed, Merck will update its guidance.

Assuming the completion of the Organon spinoff in 2021, Merck expects full-year 2021 sales from continuing operations to be between $45.8 billion and $47.8 billion.

Our Take

Merck’s first-quarter results were disappointing as it missed estimates for both earnings and sales. A decent performance of Keytruda, Lynparza, Bridion and Animal Health was offset by business disruption due to the pandemic, which particularly impactedvaccines. Though the company maintained its sales and earnings outlook for the year, shares were down around 1.8% in pre-market trading.

Merck’s stock has declined 5.8% this year so far against an increase of 2.1% for the industry.

The pandemic is expected to continue to hurt Merck’s performance particularly during the first half of 2021 and most notably with respect to vaccine sales in the United States. The company forecastsa bigger hit to 2021 sales from the pandemic than previously expected. Merck expects COVID-19 related business disruptions to hurt sales by roughly 3% in 2021, versus approximately 2%, expected previously. The entire impact relates to pharmaceutical segment sales.

Nonetheless, investors will focus on how the new Merck, with new CEO Robert Davis and without Organon, will perform this year.

Zacks Rank and Stock to Consider

Merck currently carries a Zacks Rank #3 (Hold). A better-ranked large stock from the biotech sector is Bristol-Myers BMY, carrying a Zacks Rank #2 (Buy). Bristol-Myers ’ shares have gained 6.4% this year so far. Its earnings estimates for 2021 have risen from $7.44 to $7.45 and for 2022 from $8.02 to $8.06 per share over the past 60 days.

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

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

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