Merck (MRK) Beats On Q1 Earnings & Sales, Ups Annual View

Merck & Co., Inc. (NYSE:MRK) reported first-quarter 2017 earnings of 88 cents per share, which beat the Zacks Consensus Estimate of 83 cents. However, earnings declined 1.1% from the year-ago period.

Merck’s shares rallied 6.1% so far this year, while the Zacks classified Large-Cap Pharma industry gained 6.6%.

Revenues for the quarter increased 1% year over year to $9.4 billion, beating the Zacks Consensus Estimate of $9.3 billion. The increase in revenues was driven by the continued momentum of Keytruda in oncology as well as the strength of the vaccine and other franchises and animal health.

Currency movement negatively impacted revenues by 2%.

Quarter in Detail

Merck’s Pharmaceutical segment posted revenues of $8.2 billion, up 1% year over year driven by oncology, hepatitis C and vaccines, largely offset by the loss of market exclusivity for several products, as well as lower sales in the diabetes franchise.

Keytruda recorded sales of $584 million in the reported quarter, up from $249 million in the year-ago quarter. Sales continued to be driven by label expansion of the drug. During the quarter, the FDA approved the drug for the treatment of patients with refractory classical Hodgkin lymphoma (cHL) or for patients with cHL who have relapsed after three or more prior lines of therapy.

In addition, the European Commission also approved Keytruda for the first-line treatment of non-small cell lung cancer (NSCLC) in adults whose tumors have high PD-L1 expression (tumor proportion score of 50% or more) with no EGFR or ALK positive tumor mutations. Keytruda sales gained from launches in new indications like first-line lung cancer (approved in Oct 2016), and recurrent or metastatic head and neck cancer (approved in Aug 2016) in the U.S.; and second-line NSCLC across the world.

Januvia/Janumet franchise recorded sales of $1.3 billion in the quarter, down 5% from the year-ago due to the timing of customer purchases in the U.S.

Gardasil/Gardasil 9 sales climbed 41% to $532 million.

Zepatier brought in sales of $378 million, up from $229 million in the fourth quarter of 2016, due to ongoing launches.

Meanwhile, combined sales of Remicade (lost exclusivity in Europe and facing stiff biosimilar competition in the region), Nasonex (generic version launched in the U.S. in Mar 2016), Cubicin (lost patent protection in the U.S. in Jun 2016) and Zetia (lost market exclusivity in the U.S. in Dec 2016) declined by $686 million in the quarter.

Sales of Remicade, marketed in partnership with Johnson & Johnson (NYSE:JNJ) , continue to be dampened by biosimilar competition with biosimilars benefiting from increased new patient starts as well as patient switching. In this regard, note that Pfizer Inc. (NYSE:PFE) launched its Inflectra injection, a biosimilar version of Remicade, in the U.S. in late Nov 2016.

Merck’s Animal Health segment posted revenues of $939 million, up 13% from the year-ago quarter, primarily driven by higher sales of companion animal products.

Adjusted gross margins came in at 77.8% compared to 77% in the year-ago quarter. Marketing and administrative (M&A) expenses increased 3% to $2.4 billion in the reported quarter. Research and development (R&D) spend increased 14% to $1.8 billion in the quarter, due to the timing of customer purchases in the United States.

2017 Guidance

Merck updated its 2017 earnings and revenues guidance. The company now expects adjusted earnings in the range of $3.76–$3.88, an increase from the earlier figure of $3.72–$3.87 per share, including approximately 1.5% negative foreign exchange impact. The Zacks Consensus Estimate was $3.83 per share.

Merck now expects revenues in the range of $39.1–$40.3 billion, compared to the earlier forecast of $38.6 billion–$40.1 billion, including negative currency impact of approximately 1.5%. The Zacks Consensus Estimate of $39.7 billion was well within the updated guidance.

Our Take

Merck’s first-quarter earnings were encouraging as the company beat both on sales and earnings driven by Keytruda sales along with upside from vaccines and animal health franchises. The growth in Keytruda more than offset the decline in sales from Zetia, Januvia, and Remicade among others.

We expect investors to focus on the upcoming PDUFA dates for Keytruda for the treatment of patients with metastatic or advanced NSCLC regardless of PD-L1 expression (May 10) and for the treatment of patients with locally advanced or metastatic urothelial cancer (Jun 14).

Another pharma giant Eli Lilly and Company (NYSE:LLY) is also facing loss of exclusivity for many of its key drugs in the emerging markets.

Merck currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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