Merck (MRK) Q4 Earnings & Sales Miss, CEO Frazier Steps Down

Merck & Co., Inc. MRK reported fourth-quarter 2020 adjusted earnings of $1.32 per share, which missed the Zacks Consensus Estimate of $1.36. Earnings rose 14% year over year (up 17% excluding the impact of currency) aided by higher revenues and lower promotional and selling costs in the quarter.

Including charges related to VelosBio acquisition in the quarter and discontinuation of COVID-19 vaccine development programs and certain other items, loss per share was 83 cents against earnings of 92 cents in the year-ago quarter.

Revenues increased 5% year over year (both on reported and constant currency basis) to $12.51 billion. Sales however missed the Zacks Consensus Estimate of $12.59 billion.

Merck’s stock has declined 5.5% this year so far against an increase of 0.1% for the industry.

Quarter in Detail

The Pharmaceutical segment generated revenues of $11.4 billion, up 8% (up 6% excluding Fx impact) year over year driven by strong demand for cancer drugs. However, the negative impact of the COVID-19 pandemic and generic competition for legacy drugs partially offset the growth. COVID-19 related business disruptions hurt Merck’s fourth-quarter pharmaceuticals revenues by $400 million, mostly vaccines.

Keytruda, the largest product in Merck’s portfolio, generated sales of $3.99 billion in the quarter, up 27% (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 and pricing pressure in Japan offset the growth to an extent.

Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter, reflecting continued uptake in approved indications in the United States, Europe and China. 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.

Lynparza alliance revenues increased 53% year over year to $206 million in the quarter. Lenvima alliance revenues were $158 million, up 26% from the year-ago period.

In the hospital specialty portfolio, Bridion Injection generated sales of $355 million in the quarter, up 13% year over year, reflecting higher demand.

In vaccines, Gardasil/Gardasil 9 sales rose 41% year over year to $998.0 million. Proquad, M-M-R II and Varivax vaccines recorded combined sales of $488 million, up 1% year over year. Rotateq vaccine sales declined 14% to $196 million. Sales of Pneumovax 23 vaccine were flat at $339 million.

Pharmaceutical sales were hurt by loss of U.S. market exclusivity for drugs like Nuvaring and Zetia.

Remicade sales declined 5% year over year to $88 million in the quarter. Merck markets Remicade in partnership with J&J JNJ.

Januvia/Janumet (diabetes) franchise sales declined 7% year over year to $1.33 billion, reflecting continued pricing pressure in the United States, which offset the strong demand from certain international markets. Sales of Isentress declined 6% to $211 million.

Merck’s Animal Health segment generated revenues of $1.17 billion, up 4% from the year-ago quarter. Excluding the impact of currency, sales rose 6% helped by an additional month of sales in the quarter and contribution from smaller acquisitions, which partially offset the impact of unfavorable distributor purchasing patterns.

Margin Discussion

Adjusted gross margin was 73%, up 40 basis points from the year-ago quarter driven by the favorable impact of product mix and manufacturing variances, which offset the negative impact of higher inventory write-offs and pricing pressure.

Selling, general and administrative (SG&A) expenses were $2.8 billion in the reported quarter, down 2% year over year driven by lower selling and administrative costs due to lower travel costs as a result of the pandemic. Research and development (R&D) spend rose 12% to $2.6 billion due to higher clinical development costs and increased investment in discovery research and early drug development.

2020 Results

Full-year 2020 sales rose 4% to $48.0 billion, missing the Zacks Consensus Estimate of $48.09 billion by a slight margin. Sales were within the guided range of $47.6 billion-$48.6 billion

Adjusted earnings for 2020 were $5.94 per share, which missed the Zacks Consensus Estimate of $5.97. Earnings were within the guided range of $5.91-$6.01. Earnings were up 14% year over year.

2021 Outlook

In 2021, Merck expects revenues to be in the range of $51.8 billion-$53.8 billion. This includes a positive currency impact of 2%. The Zacks Consensus Estimate for sales stands at $51.7 billion.

Adjusted earnings are now expected to be in the range of $6.48-$6.68. This includes a positive currency impact of 3%. The Zacks Consensus Estimate for earnings stands at $6.09 per share.

Adjusted operating costs are expected to be higher than 2020 by a high-single to low-double-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 be completed by the second quarter of 2021. The guidance assumes that Organon business will be part of Merck for all of 2021. Once the spin-off is completed, Merck will update its guidance.

CEO Frazier to Retire

Merck announced that its present chairman and chief executive officer (CEO), Kenneth C. Frazier will retire from his position as CEO after serving the company for almost a decade. He will be succeeded by Robert M. Davis, Merck’s current executive vice president, and chief financial officer. Frazier’s resignation as CEO will be effective from Jun 30, 2021 though he will continue to serve on Merck’s board of directors as executive chairman for a transition period.

Our Take

Merck’s fourth-quarter results were disappointing as it missed estimates for both earnings and sales. However, its 2021 financial guidance was above investor expectations. Keytruda is bringing in blockbuster sales for Merck and has become one of the most successful cancer drugs ever. However, COVID-19 hurt Merck’s sales by $2.5 billion in 2020, mostly the pharmaceuticals business.

Merck expects some residual negative impacts from COVID-19 in 2021. COVID-19 related business disruptions are expected to hurt Merck’s sales in 2021 by 2%, mainly vaccines in the United States. The impact, all of which relates to pharmaceutical segment sales, is expected to hurt mostly first-half sales. Meanwhile, costs related to development of its COVID-19 antiviral candidates are expected to increase R&D expenses in the year.

Nonetheless, investors will focus on how the new Merck, with 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 Alexion Pharmaceuticals ALXN, which carries a Zacks Rank #2 (Buy). Alexion’s shares have gained 49.3% in the past year

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

Merck & Co., Inc. price-consensus-eps-surprise-chart | Merck & Co., Inc. Quote

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