Merck (MRK) Q3 Earnings Top Estimates, COVID Drug Boosts Sales
Merck MRK reported adjusted earnings of $2.13 per share for third-quarter 2023, beating the Zacks Consensus Estimate of $1.94 per share. Earnings rose 15% year over year (22% excluding Fx impact).
Including acquisition and divestiture-related costs, restructuring costs, income and losses from investments in equity securities and certain other items, earnings per share were $1.86, up 45% year over year (55% excluding Fx impact).
Revenues rose 7% year over year (9% excluding Fx impact) to $15.96 billion. Sales beat the Zacks Consensus Estimate of $15.38 billion.
Excluding sales from Merck’s COVID-19 drug, Lagevrio, total revenues rose 6% (8% excluding Fx impact).
Quarter in Detail
The Pharmaceutical segment generated revenues of $14.26 billion, up 10% (11% excluding Fx impact) year over year, driven by higher sales of oncology drugs and strong demand for COVID-19 drug, Lagevrio (molnupiravir) in Japan. Excluding Lagevrio, Pharmaceutical sales grew 9% (10% excluding Fx impact).
Pharmaceutical segment revenues beat the Zacks Consensus Estimate as well as our model estimate of $13.76 billion.
Keytruda, the biggest product in Merck’s portfolio, generated sales of $6.34 billion in the quarter, up 17% (both including and excluding Fx impact) year over year. Keytruda sales gained from rapid uptake across earlier-stage indications like triple-negative breast cancer and renal cell carcinoma and continued strong momentum in metastatic indications. Keytruda sales marginally beat the Zacks Consensus Estimate of $6.28 billion and our estimate of $6.3 billion.
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 its tyrosine kinase inhibitor, Lenvima.
Alliance revenues from AstraZeneca-partnered Lynparza increased 6% year over year, excluding Fx impact, to $299 million in the quarter, driven by higher pricing in the United States and increased demand in Latin America. Lenvima alliance revenues were $260 million, up 30% from the year-ago period’s levels. Welireg recorded sales of $54 million, up 43% year over year.
In vaccines, sales of HPV vaccines — Gardasil and Gardasil 9 — rose 16% year over year (excluding Fx) to $2.59 billion, driven by strong global demand, particularly in China and higher pricing in the United States. However, sales growth was partially offset by unfavorable government buying patterns in the United States. Gardasil sales missed the Zacks Consensus Estimate of $2.74 billion and our estimate of $2.81 billion.
Proquad, M-M-R II and Varivax vaccines recorded combined sales of $713 million, up 6% year over year. Sales of the rotavirus vaccine, Rotateq, were down 39% to $156 million, while Pneumovax 23 (pneumococcal vaccine polyvalent) vaccine sales rose 4% to $140 million. Sales of Vaxneuvance, Merck’s new pneumococcal 15-valent conjugate vaccine, were $214 million compared with $168 million in the previous quarter, driven by continued uptake in the pediatric patient population, following its launch in the United States in 2022 and launches in Europe.
In the hospital specialty portfolio, neuromuscular blockade medicine, Bridion injection generated sales of $424 million in the quarter, flat year over year, driven by increased demand in the United States, which offset the impact of generic competition in Europe. Bridion sales missed the Zacks Consensus Estimate of $442 million.
In Diabetes, Januvia/Janumet (diabetes) franchise sales were down 25% year over year to $835 million. The drug’s sales were hurt by lower demand in the United States and generic competition in certain international markets. The drugs lost market exclusivity in China and the European Union in September last year.
Lagevrio (molnupiravir) generated sales of $640 million during the third quarter, up 51% year over year. Higher demand in Japan boosted sales of the COVID drug, which made up for no sales in the United Kingdom and witnessed lower demand in Australia.
Merck’s Animal Health segment generated revenues of $1.4 billion, up 2% year over year (both including and excluding Fx impact). The Animal Health segment sales missed the Zacks Consensus Estimate of $1.42 billion but beat our estimate of $1.34 billion.
Margin Discussion
Adjusted gross margin was 77.0%, flat year over year, as the favorable impact of product mix and lower manufacturing-related costs were offset by higher sales of Lagevrio, a low-margin product.
Adjusted selling, general and administrative expenses were $2.5 billion in the reported quarter, flat year over year, due to higher promotional spending, which was offset by lower administrative costs.
Adjusted research and development (R&D) spending was $3.3 billion, down 5.7% year over year due to some charges recorded in the year-ago quarter related to collaboration deals with Moderna MRNA, Orna and Orion. The decrease in R&D expenses was partially offset by increased headcount costs and higher pipeline development costs.
In partnership with Moderna, Merck is developing a personalized mRNA therapeutic cancer vaccine (V940/mRNA-4157) in combination with Keytruda for the treatment of adjuvant melanoma. Moderna and Merck initiated a pivotal phase III study in adjuvant melanoma in July 2023.
2023 Guidance Updated
Merck upped its revenue guidance range for the year. Merck expects revenues to be in the range of $59.7-$60.2 billion in 2023 compared with $58.6-$59.6 billion previously. Higher-than-expected Lagevrio sales led to the guidance uptick.
Lagevrio is expected to generate $1.3 billion in sales in 2023, up from $1.0 billion expected previously.
Adjusted EPS is now expected to be between $1.33 and $1.38 after accounting for upfront charges of $1.70 per share for the latest deal with Daiichi Sankyo. Previously, the company expected adjusted EPS to be between $2.95 and $3.05, which excluded the Daiichi Sankyo charge.
Last week, Merck announced a deal with Daiichi Sankyo to co-develop and co-commercialize the latter’s three DXd ADCs — patritumab deruxtecan, ifinatamab deruxtecan and raludotatug deruxtecan worldwide, except Japan.
In Japan, Daiichi Sankyo has retained exclusive rights for the development of the candidates. For the deal, Merck will make an upfront payment of $4 billion to Daiichi, while being entitled to make $1.5 billion in continued payments over the next 24 months. The deal also includes potential sales-based milestone payments of up to $16.5 billion.
The new guidance also includes incremental financing costs to advance Daiichi Sankyo’s ADC assets (4 cents per share) and an incremental impact of currency (5 cents per share).
Adjusted operating costs are expected to be in the range of $39.8 to $40.4 billion compared with the prior expectation of $34.0 to $34.6 billion. The adjusted tax rate is now expected to be approximately 39.0% to 40.0% compared with the previous expectation of 30.5% to 31.5%.
The adjusted gross margin is expected to be approximately 77% (maintained).
The cost guidance includes $17.1 billion of acquisition and upfront collaboration research and development expenses associated with Daiichi Sankyo, Prometheus, Imago and Kelun.
Our Take
Merck’s third-quarter results were better than expected as it beat estimates for earnings as well as sales. Strong sales of blockbuster cancer drug Keytruda and surprisingly higher sales of Lagevrio drove the top line in the quarter. Sales of another important product, Gardasil vaccine, missed expectations. Merck raised its full-year sales outlook.
However, the company lowered its earnings guidance for 2023 due to incremental costs related to collaborations and deals and a slightly higher impact of currency, which should be partially offset by a better operational performance.
Shares of Merck were up slightly in pre-market trading. Year to date, the stock has lost 6.6% against the industry’s 5% rise.
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Merck has also made meaningful progress in its pipeline in the past year, achieving regulatory and clinical milestones. It has initiated several phase III studies in 2023 in multiple therapeutic areas.
Zacks Rank & Stock to Consider
Merck currently carries a Zacks Rank #3 (Hold).
Merck & Co., Inc. Price and EPS Surprise
Merck & Co., Inc. price-eps-surprise | Merck & Co., Inc. Quote
A better-ranked large drug/biotech company worth considering is Gilead Sciences GILD, which has a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In the past 60 days, the consensus estimate for Gilead Sciences’ 2023 earnings has risen from $6.63 per share to $6.64 per share, while the same for 2024 has increased from $7.34 per share to $7.38 per share. Year to date, shares of Gilead Sciences have declined 8.7%.
GILD’s earnings beat estimates in two of the trailing four quarters and missed the mark in the other two, delivering an average earnings surprise of 2.77%.
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