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Merck (MRK) Q2 Earnings & Sales Beat Estimates, Cuts '24 EPS View

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Merck (MRK - Free Report) reported adjusted earnings of $2.28 per share in second-quarter 2024, beating the Zacks Consensus Estimate of $2.16. In the year-ago period, management incurred an adjusted loss of $2.06. This reported loss was due to a one-time charge of $4.02 per share incurred by the company to acquire Prometheus Biosciences, which was completed in June 2023.

Including acquisition and divestiture-related costs, restructuring costs, income and losses from investments in equity securities and certain other items, earnings were $2.14, against a loss of $2.35 in the year-ago quarter.

Revenues rose 7% year over year (11% excluding Fx) to $16.11 billion. Sales beat the Zacks Consensus Estimate of $15.90 billion.

Quarter in Detail

The Pharmaceutical segment generated revenues of $14.41 billion, up 7% year over year (11% excluding Fx). Higher sales of oncology drugs, cardiovascular and vaccines were partially offset by lower sales of Merck’s diabetes and virology medicines. Pharmaceutical segment revenues beat the Zacks Consensus Estimate of $14.16 billion and our model estimate of $14.04 billion.

All sales growth numbers discussed below exclude Fx impact.

Keytruda, the biggest product in Merck’s portfolio, generated sales of $7.27 billion in the quarter, up 21% year over year. Keytruda sales benefited from rapid uptake across earlier-stage indications like triple-negative breast cancer and renal cell carcinoma and early-stage non-small cell lung cancer,for which approval was received in the United States in October 2023. Continued strong momentum in metastatic indications also boosted sales growth. Keytruda sales beat the Zacks Consensus Estimate of $7.12 billion and our estimate of $7.11 billion.

Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter. Merck has a deal with British pharma giant AstraZeneca (AZN - Free Report) to co-develop and commercialize PARP inhibitor Lynparza and a similar one with Japan’s Eisai for its tyrosine kinase inhibitor, Lenvima.

Alliance revenues from AstraZeneca-partnered Lynparza increased 4% year over year to $317 million in the quarter, driven by higher demand in the United States and some international markets, like China and Europe. Lenvima alliance revenues were $249 million, up 4% from the year-ago period’s levels. Welireg recorded sales of $126 million, up 150% year over year.

In vaccines, sales of HPV vaccines — Gardasil and Gardasil 9 — rose 4% year over year to $2.48 billion, driven by strong demand in the United States and certain ex-U.S. markets, partially offset by lower sales in China. Though Gardasil sales missed the Zacks Consensus Estimate of $2.53 billion, it beat our estimate of $2.39 billion.

Earlier this March, MRK received FDA approval for its PAH drug Winrevair. This was the first quarter for the company recording the drug’s sales, which added $70 million to the top line. The reported figure beat our model estimate of $50 million.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $617 million, up 7% year over year. Sales of the rotavirus vaccine, Rotateq, rose 26% to $163 million, while Pneumovax 23 (pneumococcal vaccine polyvalent) vaccine sales declined 32% to $59 million. Sales of Vaxneuvance, Merck’s new pneumococcal 15-valent conjugate vaccine, were $189 million, up 16% year over year, driven by continued uptake in Europe and Japan.

In the hospital specialty portfolio, neuromuscular blockade medicine, Bridion injection generated sales of $455 million in the quarter, down 8% year over year, due to generic competition in certain ex-U.S. markets, mainly Europe and the Asia Pacific region.

In Diabetes, Januvia/Janumet (diabetes) franchise sales declined 23% year over year to $629 million. The drug’s sales were hurt by lower demand and pricing in the United States and generic competition in certain international markets, mainly Europe and Asia Pacific region.

Lagevrio (molnupiravir) generated sales of $110 million in the second quarter, down 42% year over year.

Merck’s Animal Health segment generated revenues of $1.48 billion, up 2% year over year (6% excluding Fx impact). However, the Animal Health segment’s sales missed the Zacks Consensus Estimate of $1.52 billion and our model estimates of $1.51 billion.

Margin Discussion

Adjusted gross margin was 80.9%, up 430 basis points year over year, driven by a favorable product mix (including the benefit from reduced royalties paid on Keytruda and Gardasil).

Adjusted selling, general, and administrative expenses were $2.7 billion in the reported quarter, up 2% year over year, as higher administrative costs were partially offset by the favorable impact of foreign exchange.

Adjusted research and development (R&D) spending was $3.5 billion compared with $13.3 billion in the year-ago period due to lower costs related to M&A activity in the quarter.

2024 Guidance

Merck slightly raised and narrowed its sales guidance for the year. The company now expects revenues to be in the range of $63.4-$64.4 billion in 2024, compared with its previous expectation of $63.1-$64.3 billion. The revised guidance maintains a negative impact from foreign exchange of approximately 3% on sales. The Zacks Consensus Estimate is pegged at $64.49 billion.

Following the completion of the $1.3 billion acquisition of EyeBio earlier this month, Merck updated its adjusted operating expense and adjusted earnings per share (EPS) guidance for the full year.

Adjusted EPS are expected to be between $7.94 and $8.04 versus the prior expectation of $8.53 and $8.65. This guidance includes a one-time charge of 51 cents per share related to the above acquisition. The guidance includes a negative impact from foreign exchange of more than 30 cents on EPS. The Zacks Consensus Estimate is pegged at $8.55 per share.

However, shares of Merck were down nearly 4% in pre-market trading, likely due to EPS downgrade. Investors were likely expecting an increase in EPS guidance despite accounting for the EyeBio acquisition.

Year to date, the stock has gained 17.2% compared with the industry’s 18.6% rise.

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The adjusted gross margin is expected to be approximately 81% (maintained).

Adjusted operating costs are expected to be in the range of $26.8-$27.6 billion (previously $25.2 to $26.1 billion), which includes the one-time charges for the EyeBio acquisition. The adjusted tax rate guidance is expected to be in the range of 15.5-16.5% (previously 14.5-15.5%).

Our Take

Merck’s second-quarter results were better than expected as it beat estimates for earnings as well as sales. Despite the encouraging results, management slashed its earnings guidance, which was expected to account for the recently completed EyeBio acquisition.

Strong sales of blockbuster cancer drugs drove the top line in the quarter, mainly driven by Keytruda sales, which recently obtained FDA approval for a 40th cancer indication. Though sales of another vital product, the Gardasil vaccine, also rose in the quarter, it was less than our consensus expectations.

Merck also made meaningful regulatory and clinical progress during the quarter across areas like oncology, vaccines and infectious diseases while also executing strategic business development like the EyeBio acquisition.

Merck also has some key new products lined up for launch. Between 2025 and 2030, Merck expects eight potential new product approvals. We believe that among these, Winrevair and the recently approved 21-valent pneumococcal conjugate vaccine Capvaxive (V116) have the potential to generate significant revenues for Merck over the long term. These new products and line extensions should bring in additional sales in 2024 and beyond.

 

Zacks Rank & Key Picks

Merck currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the healthcare sector are Entrada Therapeutics (TRDA - Free Report) and Halozyme Therapeutics (HALO - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, estimates for Entrada Therapeutics’ 2024 loss per share have improved from 14 cents to 13 cents. Estimates for 2025 have improved from $3.44 to $3.21 during the same period. Year to date, shares of Entrada Therapeuticshave risen 10.6%.

Earnings of Entrada Therapeutics beat estimates in two of the last four quarters while missing the mark on two other occasions. Entrada delivered a four-quarter average earnings surprise of 42.18%.

In the past 60 days, the Zacks Consensus Estimate for Halozyme Therapeutics’ earnings has risen from $3.69 per share to $3.90. For 2025, earnings estimates have increased from $4.50 to $4.81 in the past 60 days. Year to date, shares of HALO have surged 50.1%.

Earnings of Halozyme beat estimates in three of the last four quarters while meeting the mark on one occasion, delivering a four-quarter average earnings surprise of 9.40%.

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