Merck (MRK) Updates Outlook Following Q2 Earnings Beat

Merck & Co. MRK reported second quarter 2016 earnings of 93 cents per share, surpassing the Zacks Consensus Estimate by a penny and increasing 8.1% from the year-ago period.

Revenues for the quarter grew 1% to $9.8 billion, in line with the Zacks Consensus Estimate. Currency movement negatively impacted revenues by 2%.

The Quarter in Detail

Merck’s Pharmaceutical segment posted revenues of $8.7 billion, up 2%. Products like Keytruda, Cubicin and ProQuad performed well. New product, Keytruda, brought in sales of $314 million in the second quarter of 2016, up from $249 million in the first quarter of 2016. Sales continue to be driven by new indications and geographical expansion. Zetia/Vytorin sales grew 4% to $994 million reflecting the impact of price increases for Zetia in the U.S.

Recently launched HCV product Zepatier brought in sales of $112 million, up from $50 million in the first quarter. Januvia/Janumet sales grew 2% to $1.6 billion.

Cubicin sales came in at $357 million. Cubicin lost patent protection in Jun 2016 and sales are expected to fall significantly.

Meanwhile, Remicade (loss of exclusivity in Europe and increasing biosimilar competition in this region), Nasonex (generic version launched in the U.S. in Mar 2016), Gardasil/Gardasil 9 (reflecting the timing of public sector purchases) and Isentress all recorded a decline in sales.

Merck’s animal health segment posted revenues of $898 million, up 7% from the year-ago quarter.

Marketing and administrative expenses declined 5% to $2.4 billion in the second quarter of 2016. R&D spend grew 17.7% to $1.9 billion in the second quarter of 2016 reflecting higher licensing costs and increased clinical development spending.

Updates Guidance

Merck raised the bottom end of its 2016 earnings guidance to $3.67 - $3.77 per share, including an approximately 1% negative impact from foreign exchange.

Revenue guidance was narrowed to $39.1 - $40.1 billion, including an approximately 2% negative impact from foreign exchange. The Zacks Consensus Estimate for earnings and revenues is currently $3.72 per share and $39.6 billion, respectively.

Meanwhile, Merck continues to expect marketing and administrative spend to decline from 2015 levels and R&D spend to be slightly above 2015 levels. The company spent $6.6 billion and $9.8 billion on R&D and marketing and administrative matters, respectively, in 2015.

Our Take

Merck’s second quarter earnings were better-than-expected, while revenues were in line. The top-line will remain under pressure mainly due to increased competition as well as generic competition. Merck will continue to look toward cost-cutting initiatives to drive the bottom-line.

We are encouraged by the company’s efforts to expand its pipeline and focus on core areas of expertise. The company has made significant progress with its pipeline and is working on bringing new products to market. New products like Keytruda should contribute meaningfully to the top-line.

Merck is a Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the large cap pharma sector include Bristol-Myers Squibb Company (NYSE:BMY) BMY, Johnson & Johnson (NYSE:JNJ) JNJ and Eli Lilly and Company (NYSE:LLY) LLY. All three are Zacks Rank #2 (Buy) stocks.