New Jersey-based drugmaker and Dow-30 component Merck (MRK – Free Merck Stock Report) reported first-quarter earnings of $0.27 a share, versus $0.56 in the comparable period of 2017. The bottom-line dip can be primarily attributed to a $1.4 billion charge related to a recently formed collaboration with Eisai Co., which more than offset a solid increase in revenues (+6%) and reduced taxes. Meantime, adjusted earnings, which exclude one-time gains, charges, and other nonrecurring items, and are more closely followed by Wall Street, came in at $1.05 a share, versus $0.88 in 2017. The adjusted tally beat consensus expectations of $1.00, thanks in part to stronger demand for its standout immuno-oncology drugKEYTRUDA, and management responded by raising its full-year guidance. However, shares of MRK were trading a few points lower on the release.
In the March period, worldwide revenues advanced 6% year over year, to $10.04 billion. The gain was highlighted by continued strong momentum in the KEYTRUDA franchise (+151%) and double-digit growth in lead vaccine asset GARDASIL (+24%). The former benefited from recent launches with new indications globally, while the latter was fueled by solid gains in the Asia Pacific region, primarily due to the commercial entry in China. Merck's blockbuster diabetes drug JANUVIA/JANUMET (and now #2 seller behind KEYTRUDA) also performed well (+7%), as did several younger assets including BRIDEON (+38%) and SIMPONI (+26%). Growth in the animal health business (+13%) was another key catalyst, helping to offset continued generic erosion in the ZETIA/VYTORIN franchise (-18%). It is worth noting, however, that first-quarter revenue came up just short of Wall Street's $10.1 billion expectation.
Following the Q1 release, management upped its 2018 adjusted earnings guidance to $4.16-$4.28 a share (previously $4.08-$4.23) and its total revenue outlook to $41.8 billion-$43.0 billion (previously $41.2 billion-$42.7 billion). While an earnings beat and guidance raise would typically result in a bump in share price, the aforementioned top-line miss may have spooked investors. The company also reported into a markedly down tape.
In our view, Merck's long-term growth story remains heavily tied to the continued success of KEYTRUDA. While several other development programs have disappointed, KEYTRUDA seems like it can do no wrong, emerging as a clear favorite in the high-growth immuno-oncology space. With annual sales projected to exceed $8 billion by 2020, the drug should more than offset mounting generic losses on Zetia/Vytorin and upcoming patent losses. Steady, but less exciting gains in JANUVIA/JANUMET and solid momentum in animal health should provide further support. Our current projections call for sales growth of 4% annually over the next 3 to 5 years.
All told, we continue to view Merck as a solid core holding for investors seeking participation in the large pharma space. An above-average dividend yield and favorable risk profile should appeal to more conservative, income-oriented accounts.
About The Company: Merck & Co. is an international developer, manufacturer, and distributor of pharmaceuticals. Important product names include JANUVIA/JANUMET (type-2 diabetes); ZETIA/VYTORIN (hypercholesterolemia); GARDASIL (vaccine); KEYTRUDA (lung cancer); and REMICADE (arthritis). In 2014, the company made three significant acquisitions: Schering-Plough, Idenix Pharmaceuticals, and Cubist Pharmaceuticals.
— Michael Ratty
