New Jersey-based drugmaker and Dow-30 component Merck (MRK – Free Merck Stock Report) has reported second-quarter earnings of $0.63 a share, versus $0.71 in the comparable period of 2017. The year-over-year dip in profits can be attributed to higher costs tied to production (+10%), R&D (+28%), and restructuring (+37%), which more than offset a solid gain in revenues (+5%) and reduced income tax expense (-24%). The increased spending largely reflected efforts to enhance diversity within its drug portfolio and included several charges related to recent acquisitions and further pipeline development. Meantime, adjusted earnings, which exclude one-time gains, charges, and other nonrecurring items, and are more closely followed by Wall Street, came in at $1.06 a share, versus $1.01 in 2017. The adjusted tally beat the consensus expectation of $1.03, thanks, in part, to stronger demand in its standout immuno-oncology drug KEYTRUDA, and management responded by raising its full-year guidance for the second time in as many quarters. However, Merck shares traded modestly lower on the release.
In the June period, worldwide revenues advanced 5% year over year, to $10.47 billion. The gain was highlighted by continued strong momentum in the KEYTRUDA franchise (+89%) and cancer preventing vaccine GARDASIL (+30%). The former benefited from recent launches with new indications globally, while the latter was driven by growth in the Asia-Pacific region, largely due to the ongoing commercial launch in China. Merck also saw improved contributions in several complementary assets, including BRIDION (+48%), NUVARING (+18%) and SIMPONI (+17%). Growth in the Animal Health business (+14%) was another key catalyst, helping to offset continued generic erosion in the ZETIA/VYTORIN franchise (-31%) and sharp declines in Hep-C drug ZEPATIER (-78%). Altogether, June-period revenues came in modestly ahead of consensus expectations.
Following the second-quarter release, management upped its full-year adjusted earnings guidance to $4.22-$4.30 a share (previously $4.16-$4.28) and narrowed its revenue outlook to $42.0 billion-$42.8 billion (previously $41.8 billion-$43.0 billion). While an earnings beat and guidance raise would typically result in some share-price improvement, investors may have been hung up on the reduced top end of the revenue forecast. The fact that Merck shares had been outperforming leading into the second-quarter report (+14% year to date) could also have contributed to the modest selloff.
In our view, little has changed in regard to Merck's long-term growth story. While several new assets are gaining traction, and animal health remains a key component (10% of Q2 revenues), performance going forward is heavily tied to the continued success and development of KEYTRUDA. The drug has emerged as a clear favorite in the high-growth immuno-oncology space and is not only the most attractive asset in Merck's portfolio, but possibly the entire pharmaceutical industry (with exception to maybe AbbVie's HUMIRA). KEYTRUDA's annual sales are projected to exceed $8 billion by 2020, so the drug should more than offset mounting losses on the ZETIA/VYTORIN franchise and upcoming patent expirations. Our current projections call for sales growth of 4% annually over the next 3 to 5 years.
All told, we continue to view Merck stock as a solid core holding for investors seeking participation in the large pharma space. An above-average dividend yield and strong scores for Safety and Price Stability make it a good fit for risk-averse, income-oriented portfolios.
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
