What's In Store For Merck (MRK) This Earnings Season?

Merck & Co., Inc. (NYSE:MRK) will be reporting first-quarter 2017 earnings on May 2, before market opens. Last quarter, the company delivered a positive earnings surprise of 1.14%.

Merck’s performance has been pretty impressive, with the company exceeding earnings expectations consistently. The average positive earnings surprise over the last four quarters is 4.03%

Merck’s shares rose 5.8% this year so far compared with 5.3% for the Zacks classified Large-Cap Pharma industry.

Factors to Consider

Merck’s new products like Keytruda (cancer) and Zepatier (HCV) have been doing well. We believe strong uptake, launches in new countries and expansion into additional indications, especially first-line NSCLC indication, should drive Keytruda’s sales. At the fourth quarter conference call, management guided that lung cancer sales are expected to accelerate sharply in the first quarter of 2017. Keytruda received FDA approval for the first-line NSCLC setting in Oct 2016 and EU approval in Jan 2017. That apart, continued strength in the melanoma indication and rapid penetration of head and neck cancer indication should boost Keytruda sales.

Meanwhile, ongoing launches in the U.S. supported by launches in the EU and Japan late in the fourth quarter should boost Zepatier’s sales this quarter.

Zinplava (bezlotoxumab), launched for the prevention of Clostridium difficile (C. difficile) infection recurrence, in the U.S. in Feb 2017 should bring in some sales this quarter.

However, the company faces headwinds in the form of genericization of key drugs as well as increasing competition and the negative impact of currency exchange.

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) are likely to decline in the quarter.

Sluggish growth of the integrase class and continued competitor dynamics in the U.S. and Europe will affect Isentress’ sales.

It should be noted that at the fourth quarter conference call, management had warned that while sales of drugs that have lost patent exclusivity will continue to decline rapidly, the full benefit of the ramp from new product launches, such as Keytruda and Zepatier, will be realized only from the second half of 2017. Meanwhile, operating expenses are expected to be higher in the first half of 2017 largely due to higher promotional expense for Keytruda and the phasing of clinical spend.

At the call, investors will look for update on the performance of Merck’s DPP-4 inhibitor – Januvia – including the effect of pricing pressure and whether it is losing any share to SGLT2.

Earnings Whispers

Our proven model does not conclusively show that Merck is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and 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.

Zacks ESP: Its Earnings ESP is 0.00% as both the Most Accurate estimate as well as the Zacks Consensus Estimate stand at 83 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Merck’s Zacks Rank #3 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

Stocks in the pharma sector that have both a positive ESP and a favorable Zacks Rank are:

Proteostasis Therapeutics, Inc. (NASDAQ:PTI) , which is expected to release results on May 12, has an Earnings ESP of +5.17% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Amgen, Inc. (NASDAQ:AMGN) with an Earnings ESP of +2.33% and a Zacks Rank #3. The company is scheduled to release results on Apr 26.

Scheduled to release results on May 2, Gilead Sciences, Inc. (NASDAQ:GILD) has an Earnings ESP of +2.77% and a Zacks Rank #3.

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