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Merck (MRK) to Report Q2 Earnings: What's in the Cards?

Zacks Equity Research

Merck & Co., Inc. MRK will report second-quarter 2019 resultson Jul 30 before market open. In the last reported quarter, the company delivered a positive earnings surprise of 16.19%.

Merck’s performance has been pretty impressive, with the company exceeding earnings expectations in all the trailing four quarters. The average positive earnings surprise was 5.67%.

Merck & Co., Inc. Price and EPS Surprise

 

Merck & Co., Inc. Price and EPS Surprise

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

 

Merck’s shares have risen 7.3% in the year so far against 1.3% decrease for the industry.

 

 

Let’s see how things are shaping up for this announcement.

Factors to Consider

Merck’s relatively newer products like cancer drug Keytruda, Gardasil vaccine and Bridion injection should continue to drive the top line this quarter driven by strong demand trends. Alliance revenues from Lynparza and Lenvima should also boost oncology sales.

However, loss of market exclusivity for several drugs including Zetia and Vytorin, pricing pressure, currency headwinds, softness in the diabetes (Januvia/Janumet) franchise, and lower sales of key products like Zostavax and Zepatier due to competitive pressure may hurt sales.

Keytruda sales should once again be driven by the launch of new indications globally. Sales of the drug are gaining particularly from strong momentum in first-line lung cancer indication both as monotherapy and with the rollout of the chemo combo in both non-squamous and squamous NSCLC.

This year so far, Keytruda has gained several label expansion approvals. It was approved by the FDA as an adjuvant therapy for high-risk stage III melanoma and for five new cancer line extensions in Japan in the first quarter. In April, the FDA gave approval to Keytruda in combination with Pfizer’s PFE Inlyta for the first-line treatment of advanced renal cell carcinoma as well as for an expanded first-line lung cancer patient population. In June, Keytruda was approved by the FDA for first-line treatment of recurrent or metastatic HNSCC and for previously treated advanced small-cell lung cancer. All these label expansion approvals should drive sales of Keytruda in the soon-to-be-reported quarter and through 2019.

Strong demand in most markets is driving sales of Bridion (sugammadex) Injection – a trend we expect to see in the second-quarter results as well. Meanwhile, commercial launch in China and strong growth in Europe should drive sales of Gardasil/Gardasil 9 vaccine. However, sales of the vaccine declined in United States in the first quarter due to unfavorable public sector buying patterns. It remains to be seen if U.S. sales trends of Gardasil improve in the second quarter.

Animal health franchise sales should improve from a relatively weaker performance in the first quarter.

Meanwhile adjusted gross margin is expected to be hurt by lower prices, royalty payments, currency fluctuations and the continued amortization of collaboration milestones.

Earnings Whispers

Our proven model does not conclusively show that Merck will beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Earnings ESP: Its Earnings ESP is -0.22%. The Zacks Consensus Estimate stands at $1.16 per share. You can uncover the best stocks to buy or sell before they’re reported with ourEarnings ESP Filter.

Zacks Rank: Merck’s Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some large drug/biotech stocks that have the right combination of elements to beat on earnings this time around:

AbbVie ABBV has an Earnings ESP of +0.12% and a Zacks Rank #2. The company is slated to release results on Jul 26. You can see the complete list of today’s Zacks #1 Rank stocks here.

Bristol-Myers Squibb Company BMY has an Earnings ESP of +0.28% and a Zacks Rank #3. The company is scheduled to release results on Jul 25.

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