Merck (MRK) Beats On Q3 Earnings & Revenues, Lifts View

Merck & Co., Inc. (NYSE:MRK) reported third-quarter 2016 earnings of $1.07 per share, comfortably surpassing the Zacks Consensus Estimate of 98 cents and increasing approximately 12% from the year-ago period.

Again, revenues for the quarter were up 5% to $10.54 billion, beating the Zacks Consensus Estimate of $10.24 billion. Reported revenues included an estimated benefit of about $150 million of additional sales in Japan resulting from the timing of shipments in anticipation of a resource planning system that the company will implement in the fourth quarter of 2016.

Currency movement negatively impacted revenues by 1%.

Quarter in Detail

Merck’s Pharmaceutical segment posted revenues of $9.4 billion, up 6% year over year. Products like Keytruda, Gardasil/Gardasil 9 and ProQuad performed well. Keytruda brought in sales of $356 million in the third quarter of 2016, up from $314 million in the second quarter of 2016. Sales continued to be driven by new indications and geographical expansion.

Zetia/Vytorin sales inched up 1% to $944 million, reflecting higher sales in Japan due to the timing of shipments. Zetia is expected to lose market exclusivity in the U.S. in Dec 2016 and sales are expected to decline significantly thereafter.

Gardasil/Gardasil 9 sales surged 38% to $860 million, indicating the timing of public sector purchases, and higher pricing and demand in the U.S.

Recently launched hepatitis C virus treatment, Zepatier, brought in sales of $164 million, up from $112 million in the second quarter of 2016.

Meanwhile, 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), Januvia/Janumet and Isentress recorded a decline.

Merck’s Animal Health segment posted revenues of $865 million, up 5% from the year-ago quarter.

Marketing and administrative (M&A) expenses declined 3% to $2.4 billion in the third quarter of 2016, reflecting lower selling costs and promotional spending due to prioritizing investments in key brands and the favorable foreign exchange movement.

Research and development (R&D) spend increased 5% to $1.6 billion in the quarter, reflecting higher clinical development spending.

2016 Guidance Upped

Merck narrowed and raised its 2016 guidance for both earnings and revenues. The company now expects earnings in the range of $3.71 to $3.78 per share, including approximately 1% negative foreign exchange impact. At the time of releasing second-quarter 2016 results, the company had guided earnings of $3.67–$3.77 per share, including around 1% negative foreign exchange impact.

Merck now expects revenue in the range of $39.7–$40.2 billion, including negative currency impact of approximately 2%. At the time of releasing second-quarter 2016 results, the company had guided revenues of $39.1–$40.1 billion, including negative foreign exchange impact of approximately 2%.

The Zacks Consensus Estimate for earnings stands at $3.74 on revenues of $39.65 billion, respectively.

Meanwhile, Merck continues to expect a year-over-year decline in M&A spend and an increase in R&D spend. The company had spent $6.6 billion and $9.8 billion on R&D and M&A, respectively, in 2015.

MERCK & CO INC Price, Consensus and EPS Surprise

Our Take

Merck delivered better-than-expected third-quarter 2016 results with both the top and the bottom line surpassing expectations. The top line will, however, remain under pressure mainly due to increased competition as well as generic entry. The company will thus continue to pursue cost-cutting initiatives to drive the bottom line.

Nevertheless, 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 continue to contribute meaningfully to the top line.

Zacks Rank & Key Picks

Merck currently carries a Zacks Rank #2 (Buy). Some favorably placed stocks in the health care sector include BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) , Exelixis, Inc. (NASDAQ:EXEL) and Incyte Corporation (NASDAQ:INCY) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Incyte’s earnings estimates for 2016 and 2017 were up a respective 10% and 2.8% over the last 60 days. The company has beaten earnings estimates thrice in the last four quarters with an average surprise of 335.16%.

Exelixis has an average positive surprise of 9.10% over the trailing four quarters. Its share price has jumped 100.2% year to date. The loss estimates for both 2016 and 2017 have narrowed down over the past 60 days.

Loss estimates for BioMarin have narrowed from 28 cents to 25 cents for 2016 and from $1.16 to $1.11 for 2017 over the last 60 days.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>