New Jersey-based drugmaker and Dow-30 component Merck (MRK - Free Merck Stock Report) reported fourth-quarter earnings of $0.42 a share, versus $0.35 in the comparable period of 2015. The bottom-line improvement was driven by continued cost reductions, particularly on the materials/production (-13%) and other (-20%) expense lines. More modest pullbacks in R&D (-4%) and marketing and administrative (-1%) expenses also contributed, helping to offset a slight year-over-year dip in revenues (-1%). Meantime, adjusted earnings, which exclude one-time gains, charges, and other nonrecurring items, and are more closely followed by Wall Street, came in at $0.89 a share, versus $0.93 in 2015. The adjusted figure squeaked by consensus expectations of $0.88 as better-than-expected cost controls helped offset a top-line miss. All told, Merck concluded full-year 2016 with GAAP earnings of $2.04 a share, up from $1.56 in 2015, and adjusted earnings of $3.78 a share, up from $3.59 in 2015. Shares of MRK rose more than 2% on the release.
In the December period, worldwide sales declined 1% year over year, to $10.1 billion. While Merck continued to see strong growth from some of its newer assets in oncology, diabetes, and hepatitis-C, the impact was largely mitigated by increased generic competition on the core lineup including, CUBICIN (sales -63%), REMICADE (-32%), and ZETIA/VYTORIN (-13%). On a positive note, the company's top-selling JANUVIA/JANUMET franchise saw sales increase 4%, representing a nice rebound from a 1% decline in the third quarter. For full-year 2016, Merck's revenues increased 1% to $39.8 billion, ending a four-year streak of decline.
With generic pressures on more mature franchises mounting, Merck will continue to lean heavily on its new product lineup to drive comps in 2017. Encouragingly, its standout asset KEYTRUDA continues to impress and a recently failed trial from key competitor OPDIVO (made by Bristol-Myers Squibb (BMY)) appears to have cemented its status as a leader in the red-hot, immuno-oncology market. KEYTRUDA generated revenues of $483 million in the fourth quarter (+125%) and $1.4 billion for full-year 2016 (+148%). The company's development program for the drug is ongoing and includes more than 30 tumor types and 360 clinical trials. Some analysts estimate it could top $8 billion in annual sales by 2021. Another product to keep an eye on is ZEPATIER, which was approved in January, 2016 as a treatment for hepatitis-C. ZEPATIER generated revenues of $229 million in the fourth quarter (+40% sequentially) and $555 million for the year. We view the drug as a solid long-term complement to KEYTRUDA.
Following the fourth-quarter report, management released a largely in line 2017 outlook. For the full year, it expects adjusted earnings of $3.72-$3.87 a share on revenues of $38.6 billion-$40.1 billion, where analysts on average were targeting $3.85 and $40.0 billion. The guidance reflects a projected 2% negative impact from foreign exchange.
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 superior grades for Safety (1) and Financial Strength (A++) should appeal to risk-averse, income-oriented accounts.
About The Company: Merck & Co. is an international developer, manufacturer, and distributor of pharmaceuticals. Important product names include JANUVIA (type-2 diabetes); ZETIA (hypercholesterolemia); and REMICADE (arthritis). The company acquired Medco in November of 1993 and spun it off again in August of 2003. It acquired Schering-Plough in 2009.
