New Jersey-based drugmaker and Dow-30 component Merck (MRK – Free Merck Stock Report) has reported third-quarter earnings of $0.73 a share, versus a loss of $0.02 in the comparable period of 2017. The strong improvement was primarily driven by a sharp decline in R&D costs (-53%), as last year's figure included a $2.35 billion charge related to an oncology collaboration with AstraZeneca (AZN). However, mid-single-digit growth on the top line and a slight reduction in marketing and administrative expenses provided additional support. Meantime, adjusted earnings, which exclude one-time gains, charges, and other nonrecurring items, and are more closely followed by Wall Street, came in at $1.19 a share, versus $1.11 in 2017. The adjusted tally beat consensus expectations of $1.14, helped by better-than-anticipated demand for standout immuno-oncology drug KEYTRUDA, and management responded by increasing its full-year guidance for the third time in as many quarters. Despite the beat and raise, shares of MRK were trading a few points lower on the release.
In the September period, worldwide revenues advanced 5% year over year, to $10.79 billion. The gain was highlighted by strong growth in the KEYTRUDA franchise (+80%), which benefited from recent launches with new indications and continued momentum in the non-small cell lung cancer (NSCLC) market, and another impressive performance from lead vaccine asset GARDASIL (+55%), owing to higher sales in Europe and the ongoing commercial launch in China. Together, the two drugs combined for about 27% of Merck's total revenue and helped mitigate weakness in the JANUVIA/JANUMET diabetes franchise (-2%) and lingering generic pressures on ZETIA/VYTORIN (-44%). Solid gains in complementary products like BRIDION (+17%) and NUVARING (+9%), and modest growth in the Animal Health business (+2%) provided additional offsets.
Following the third-quarter release, management upped its full-year adjusted earnings guidance to $4.30-$4.36 a share (previously $4.22-$4.30) and narrowed its revenue outlook to $42.1 billion-$42.7 billion (previously $42.0 billion-$42.8 billion). It also announced a revamped capital allocation strategy which included a 15% increase to its quarterly dividend payout (to $0.55 a share) and an additional $10 billion of share-repurchase authorization.
In our view, little has changed in regard to Merck's long-term growth story. While several core drugs are gaining traction and the animal health business remains a key component (9% of Q3 revenues), performance going forward remains heavily tied to the continued success and development of KEYTRUDA. The drug has emerged as a clear favorite in the attractive immuno-oncology space, and perhaps more importantly, has established a dominant position in the most lucrative segment of the market, lung cancer. Current projections suggest that annual sales could exceed $12 billion by 2024.
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 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
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
