Merck (MRK) Beats On Q1 Earnings, Lags Sales, Raises Outlook

Merck & Co., Inc. (NYSE:MRK) reported first-quarter 2018 adjusted earnings of $1.05 per share, which beat the Zacks Consensus Estimate of 99 cents by 6.1%. Earnings rose 19.3% year over year attributable to slightly higher sales and lower R&D costs in the quarter.

Including a $1.4 billion charge related to the formation of a collaboration with Eisai, first-quarter 2018 earnings per share were 27 cents compared with earnings of 56 cents per share in the year-ago quarter.

Revenues for the quarter rose 6% year over year to $10.04 billion. Sales, however, slightly missed the Zacks Consensus Estimate of $10.12 billion. Currency movement positively impacted revenues by 3%. Excluding currency impact, sales rose 3% year over year.

Quarter in Detail

The Pharmaceutical segment generated revenues of $8.92 billion, up 9% (up 4% excluding Fx impact) year over year mainly as strong sales of PD-1 inhibitor, Keytruda, Gardasil and Bridion offset lower sales of other key therapies – RotaTeq, Zepatier (hepatitis C) and Zostavax (prevention of shingles). As in the previous quarters, loss of market exclusivity for several drugs also hurt the top line.

Keytruda, the largest product in the Merck portfolio, brought in sales of $1.5 billion in first-quarter 2018, up 12.9% sequentially and 151% year over year. Sales continued to be driven by the launch of new indications globally. Keytruda sales are gaining particularly from strong momentum in the indication of first-line lung cancer as it is the only anti-PD-1 approved in first-line setting.

Keytruda is already approved for many types of cancers and treatment settings including lung cancer, melanoma, head and neck cancer, classical Hodgkin’s lymphoma and bladder cancer.

The Keytruda development program is also progressing well in 2018 with several regulatory decisions for new indications in the United States as well as in Europe pending for the year. The label expansion, if approved, will expand the patient population, which should drive sales higher.

Zepatier brought in sales of $131 million, down from $378 million in the year-ago quarter, due to increased competition and declining volume, which is expected to continue in 2018.

Bridion (sugammadex) Injection generated sales of $204 million in the quarter, up 38% year over year, driven by strong global demand.

Meanwhile, combined sales of Remicade (lost exclusivity in Europe and facing stiff biosimilar competition in the region), Cancidas (lost exclusivity in Europe in 2017), Zetia (lost market exclusivity in the United States in December 2016) and Vytorin (lost U.S. exclusivity in April 2017) declined almost $200 million in the quarter.

Remicade sales declined 27% to $167 million in the quarter. Merck markets the branded version of Remicade outside the United States while Johnson & Johnson (NYSE:JNJ) markets the rheumatoid arthritis drug within the country.

Cancidas sales plunged 25% to $91 million in the quarter. The Zetia/Vytorin franchise recorded sales of $471 million, down 18% due to loss of exclusivity for both Zetia and Vytorin.

Sales of Isentress declined 8% to $281 million in the quarter. The Januvia/Janumet (diabetes) franchise sales rose 7% to $1.4 billion as higher international sales were partially offset by lower U.S. sales due to continued pricing pressure.

Gardasil/Gardasil 9 sales rose 24% to $660 million as lower sales in the United States were offset by commercial launch in China and strong growth in Europe. Continued transition to two-dose regimens impacted volumes unfavorably in the United States.

Zostavax sales declined 58% to $65 million in the quarter as it faced strong competition from Glaxo’s (NYSE:GSK) newly approved shingles vaccines, Shingrix.

Merck’s Animal Health segment generated revenues of $1.1 billion, up 13% (up 7% excluding Fx impact) from the year-ago quarter, primarily driven by higher sales of companion animal products, and growth in the ruminants and poultry business.

Gross Margins Decline & R&D Costs Increase

Adjusted gross margin came in at 75.7%, down 170 basis points (bps) from the year-ago quarter.

Marketing and administrative (M&A) expenses were $2.5 billion in the reported quarter, up 2%. Research and development (R&D) spend decreased 1% to $1.8 billion in the quarter due to lower licensing costs, partially offset by increased investment in pipeline and early drug development.

2018 Guidance Raised

Merck raised its outlook for 2018 revenues to the range of $41.8 billion – $43.0 billion (previously $41.2 billion – $42.7 billion). The Zacks Consensus Estimate stands at $41.83 billion. The revenue guidance includes approximately 2% positive impact from currency fluctuation.

The company now expects adjusted earnings in the range of $4.16–$4.28, raising it from the previous guidance of $4.08–$4.23. The Zacks Consensus Estimate is pegged at $4.18 per share. The adjusted earnings guidance includes approximately 1% positive impact from currency fluctuation.

Adjusted operating expenses are still expected to increase year over year at a low- to mid-single digit rate.

Our Take

Merck’s first-quarter results were mixed as the company beat estimates for earnings but missed the same for sales. It also raised its guidance for 2018.

Shares were down 1.5% in pre-market trading. So far this year, Merck’s shares have outperformed the industry. Merck’s shares have risen 4.6% in the period, against a 4.4% decrease for the industry.

All eyes were on the performance of Keytruda, which is being touted as a key long-term growth driver for Merck. The drug continued its robust performance on strong demand trends. With several label expansions slated for this year, sales are expected to increase further. However, the significant decline in sales of Zostavax and Zepatier due to rising competitive pressure remains a concern. Meanwhile, generic competition for several drugs and pricing pressure will continue to be overhangs on the top line.

Zacks Rank & Key Pick

Merck carries a Zacks Rank #2 (Buy). Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) is a better-ranked stock in the health care sector, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ligand’s earnings per share estimates moved up from $4.20 to $4.40 for 2018 and remained stable at $5.32 for 2019 in the last 30 days. The company delivered a positive surprise in three of the trailing four quarters with an average beat of 24.88%. Share price of the company has increased 13.1% in a year.

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