New Jersey-based drugmaker Merck & Co. (MRK – Free Merck Stock Report) has reported a third-quarter GAAP loss of $0.02 a share, versus $0.78 in the comparable period of 2016. The sharp year-over-year decline in profits can be primarily attributed to a $2.35 billion charge related to the formation of an oncology collaboration with AstraZeneca (see below), and to a lesser extent reduced revenues (-2%). Meantime, adjusted earnings, which exclude one-time gains, charges, and other nonrecurring items, and are more closely followed by Wall Street, came in at $1.11 a share, versus $1.07 in 2016. The adjusted figure beat consensus expectations of $1.03 a share (and our $1.02 estimate), but revenues were a bit light due in part to the NotPetya cyber attack in the second quarter, which disrupted the company's manufacturing operations. While management raised its full-year GAAP earnings guidance to $1.78-$1.84 (previously $1.60-$1.72) and its adjusted range to $3.91-$3.97 a share (previously $3.76-$3.88), shares of MRK were trading 4%-5% lower on the release.
In the September period, worldwide revenues dipped 2% year over year, to $10.33 billion. Management indicated that the aforementioned cyber attack cost the company roughly $135 million in sales, but results were also hurt by reductions in several key products. Merck's top-grossing JANUVIA/JANUMET franchise (15% of total revenue) saw its sales decline 2% due to pricing pressure, while #3 seller GARDASILplummeted 22%, owing to weakness in the United States. Continued generic erosion in ZETIA/VYTORIN (-51%) and REMICADE (-31%) were also significant drags. On a positive note, the company's standout immuno-oncology asset KEYTRUDA further exhibited strong momentum (+194%), as did Hep-C drugZEPATIER (+185%). Strength in the animal health business (+16%) provided additional support. Management raised its full-year revenue outlook slightly, from $39.4 billion-$40.4 billion, to $40.0 billion-$40.5 billion.
On July 27th, Merck struck a deal with AstraZeneca to co-develop and co-commercialize one of Astra's most-promising oncology assets, LYNPARZA. The drug's pipeline has grown considerably in recent years, with 14 indications currently being developed across several tumor types, including breast, prostate, and pancreatic cancers. Astra is hopeful that Merck's broad development of KEYTRUDA could help maximize the potential of LYNPARZA, and was willing to give up half of the drug's future sales to find out. While Merck will shoulder a big portion of the near-term costs, the payoff could be substantial. Under the terms, Merck agreed to pay up to $8.5 billion in total consideration, including $1.6 billion upfront.
Merck's long-term growth story remains heavily tied to the continued development and success of its oncology program, specifically immunotherapy asset KEYTRUDA. The drug surpassed the $1 billion sales mark in the third quarter and currently represents the company's second-largest revenue generator (10% of total sales). KEYTRUDA has already racked up regulatory approvals for a wide range of indications, and development efforts are ongoing. Current estimates suggest the drug could top $8 billion in annual sales by 2021.
All told, we continue to view MRK 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. Moreover, the recent pullback has provided a more favorable entry point.
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 (January), Idenix Pharmaceuticals (June), and Cubist Pharmaceuticals (December).
— Michael Ratty
