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Why Is Merck (MRK) Up 3.7% Since the Last Earnings Report?
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It has been about a month since the last earnings report for Merck & Company, Inc. (MRK - Free Report) . Shares have added about 3.7% in that time frame, underperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Merck Beats on Fourth-Quarter Earnings, Pharmaceutical Sales Down
Merck reported fourth-quarter 2016 earnings of $0.89 per share, which beat the Zacks Consensus Estimate of $0.88 by a penny. However, earnings declined 4.3% (down 1% excluding currency headwinds) from the year-ago period due to lower revenues and higher taxes.
Revenues for the quarter dipped 1% year over year to $10.12 billion, missing the Zacks Consensus Estimate of $10.20 billion by 0.8%. Lower pharmaceutical sales hurt the top line in the quarter. Revenues were also hurt by approximately $150 million in sales in Japan, which occurred in the third quarter ahead of a resource planning system implemented in the fourth quarter of 2016.
Currency movement negatively impacted revenues by 1%.
Quarter in Detail
Merck’s Pharmaceutical segment posted revenues of $8.9 billion, down 1% year over year due to the loss of market exclusivity for many drugs. However, new products like cancer drug Keytruda and hepatitis C virus treatment Zepatier did well in the quarter.
Keytruda brought in sales of $483 million in the fourth quarter of 2016, up 35.6% sequentially and 125% year over year. Sales continued to be driven by label as well as geographical expansion.
U.S. sales were driven by continued strength in melanoma, rapid penetration of head and neck cancer, and the launch in the first line lung cancer setting. At the call, management said it experienced “significant acceleration” in PD-L1 testing for NSCLC patients since approval for the first line indication in Oct 2016. Lung cancer sales are expected to accelerate sharply in the first quarter of 2017.
Outside U.S, Keytruda sales were primarily driven by the melanoma indication. Meanwhile, at the call, management said it is launching the drug in second-line NSCLC indication in more than 50 markets outside U.S. In Japan, it expects to launch the drug for first-line and second-line lung as well as melanoma indication for which it received approvals in Dec 2016.
Gardasil/Gardasil 9 sales climbed 9% to $542 million driven by increased pricing and demand in the U.S.
Zepatier, brought in sales of $229 million, up from $164 million in the third quarter of 2016 driven by ongoing launches in the U.S. and supported by launches in the EU and Japan late in the fourth quarter.
Januvia/Janumet franchise recorded sales of $1.51 billion in the quarter, up 4% from the year-ago quarter as higher sales in the U.S. offset lower sales in Japan.
Bridion (sugammadex) Injection generated sales of $139 million in the quarter, up almost 50% year over year, driven by the ongoing launch in the U.S. as well as continued demand in Europe, the emerging markets, and Japan.
Meanwhile, combined sales of Remicade (lost exclusivity in Europe and facing stiff biosimilar competition in the region), Nasonex (generic version launched in the U.S. in Mar 2016), Cubicin (lost patent protection in the U.S. in Jun 2016) and Zetia (lost market exclusivity in the U.S. in Dec 2016) declined $564 million in the quarter. Sales of ProQuad vaccine and Isentress also declined in the quarter.
Remicade sales declined 32% to $269 million in the quarter. Remicade continues to be affected by biosimilar competition with biosimilars benefiting from increased new patient starts as well as patient switching. Remicade sales are expected to continue to decline due to competitive pressure and also increased switching.
Nasonex sales declined 52% to $112 million in the quarter. Following better-than-expected sales in the third quarter due to a delay in entry of generics, Cubicin sales plunged 63% to $119 million in the fourth quarter.
The Zetia/Vytorin franchise recorded sales of $873 million, down 13% due to loss of exclusivity for Zetia. In Apr 2017, Merck will lose market exclusivity in the U.S. for Vytorinn. Sales of the drug are expected to decline sharply in the U.S. thereafter.
ProQuad sales declined 1% to $405 million in the quarter.
Isentress sales declined 10% in the quarter to $337 million. Lower volumes/demand due to competitive pressure is hurting sales of Isentress.
Merck’s Animal Health segment posted revenues of $884 million, up 6% from the year-ago quarter, primarily driven by higher sales of companion animal products.
Margin Discussion
Adjusted gross margins were flat in the quarter at 74.8% year due to unfavorable mix impact of generic competition for Zetia and Cubicin in the U.S.
Marketing and administrative (M&A) expenses were flat at $2.57 billion in the fourth quarter of 2016. Research and development (R&D) spend declined 3% to $1.74 billion in the quarter, reflecting lower licensing costs.
2016 Results
Full-year sales rose 1% to $39.8 billion, slightly missing the Zacks Consensus Estimate of $39.9 billion. Revenues were, however, within the guided range of $39.7–$40.2 billion.
Adjusted earnings for 2016 were $3.78 per share, up 5.3% year over year and above the Zacks Consensus Estimate of $3.77. Earnings were in line with the higher end of the projected range of $3.71 to $3.78.
2017 Guidance
Merck issued its 2017 earnings and revenues guidance. The company expects earnings in the range of $3.72–$3.87 per share, including approximately 2% negative foreign exchange impact. Excluding currency headwinds, 2017 EPS growth is expected in a range of flat to up 4%.
Merck expects revenues in a range of $38.6 billion to $40.1 billion, including negative currency impact of approximately 2%. The sales guidance fell slightly short of the then Zacks Consensus Estimate of $40.17 billion.
Adjusted gross margin is expected to increase moderately in 2017 versus 2015 despite the negative impact of a 6.5% royalty on global sales of Keytruda to Bristol Myers
Operating expenses are expected to increase at a low single-digit rate, driven by an increase in R&D spending, while marketing and administrative expenses are anticipated to be relatively flat.
While sales of drugs that have lost patent exclusivity will continue to decline rapidly, the full benefit of the ramp from new product launches, such as Keytruda and Zepatier will be realized only from the second half of 2017. Meanwhile, operating expenses are expected to be higher in the first half largely due to higher promotional expense for Keytruda and the phasing of clinical spend.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared with three lower.
At this time, Merck stock has a Growth Score of 'B', however its Momentum is lagging a bit with a 'D'. Following the exact same course, the stock was allocated also a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the company's stock is more suitable for growth investors than value investors.
Outlook
Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.
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Why Is Merck (MRK) Up 3.7% Since the Last Earnings Report?
It has been about a month since the last earnings report for Merck & Company, Inc. (MRK - Free Report) . Shares have added about 3.7% in that time frame, underperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Merck Beats on Fourth-Quarter Earnings, Pharmaceutical Sales Down
Merck reported fourth-quarter 2016 earnings of $0.89 per share, which beat the Zacks Consensus Estimate of $0.88 by a penny. However, earnings declined 4.3% (down 1% excluding currency headwinds) from the year-ago period due to lower revenues and higher taxes.
Revenues for the quarter dipped 1% year over year to $10.12 billion, missing the Zacks Consensus Estimate of $10.20 billion by 0.8%. Lower pharmaceutical sales hurt the top line in the quarter. Revenues were also hurt by approximately $150 million in sales in Japan, which occurred in the third quarter ahead of a resource planning system implemented in the fourth quarter of 2016.
Currency movement negatively impacted revenues by 1%.
Quarter in Detail
Merck’s Pharmaceutical segment posted revenues of $8.9 billion, down 1% year over year due to the loss of market exclusivity for many drugs. However, new products like cancer drug Keytruda and hepatitis C virus treatment Zepatier did well in the quarter.
Keytruda brought in sales of $483 million in the fourth quarter of 2016, up 35.6% sequentially and 125% year over year. Sales continued to be driven by label as well as geographical expansion.
U.S. sales were driven by continued strength in melanoma, rapid penetration of head and neck cancer, and the launch in the first line lung cancer setting. At the call, management said it experienced “significant acceleration” in PD-L1 testing for NSCLC patients since approval for the first line indication in Oct 2016. Lung cancer sales are expected to accelerate sharply in the first quarter of 2017.
Outside U.S, Keytruda sales were primarily driven by the melanoma indication. Meanwhile, at the call, management said it is launching the drug in second-line NSCLC indication in more than 50 markets outside U.S. In Japan, it expects to launch the drug for first-line and second-line lung as well as melanoma indication for which it received approvals in Dec 2016.
Gardasil/Gardasil 9 sales climbed 9% to $542 million driven by increased pricing and demand in the U.S.
Zepatier, brought in sales of $229 million, up from $164 million in the third quarter of 2016 driven by ongoing launches in the U.S. and supported by launches in the EU and Japan late in the fourth quarter.
Januvia/Janumet franchise recorded sales of $1.51 billion in the quarter, up 4% from the year-ago quarter as higher sales in the U.S. offset lower sales in Japan.
Bridion (sugammadex) Injection generated sales of $139 million in the quarter, up almost 50% year over year, driven by the ongoing launch in the U.S. as well as continued demand in Europe, the emerging markets, and Japan.
Meanwhile, combined sales of Remicade (lost exclusivity in Europe and facing stiff biosimilar competition in the region), Nasonex (generic version launched in the U.S. in Mar 2016), Cubicin (lost patent protection in the U.S. in Jun 2016) and Zetia (lost market exclusivity in the U.S. in Dec 2016) declined $564 million in the quarter. Sales of ProQuad vaccine and Isentress also declined in the quarter.
Remicade sales declined 32% to $269 million in the quarter. Remicade continues to be affected by biosimilar competition with biosimilars benefiting from increased new patient starts as well as patient switching. Remicade sales are expected to continue to decline due to competitive pressure and also increased switching.
Nasonex sales declined 52% to $112 million in the quarter. Following better-than-expected sales in the third quarter due to a delay in entry of generics, Cubicin sales plunged 63% to $119 million in the fourth quarter.
The Zetia/Vytorin franchise recorded sales of $873 million, down 13% due to loss of exclusivity for Zetia. In Apr 2017, Merck will lose market exclusivity in the U.S. for Vytorinn. Sales of the drug are expected to decline sharply in the U.S. thereafter.
ProQuad sales declined 1% to $405 million in the quarter.
Isentress sales declined 10% in the quarter to $337 million. Lower volumes/demand due to competitive pressure is hurting sales of Isentress.
Merck’s Animal Health segment posted revenues of $884 million, up 6% from the year-ago quarter, primarily driven by higher sales of companion animal products.
Margin Discussion
Adjusted gross margins were flat in the quarter at 74.8% year due to unfavorable mix impact of generic competition for Zetia and Cubicin in the U.S.
Marketing and administrative (M&A) expenses were flat at $2.57 billion in the fourth quarter of 2016. Research and development (R&D) spend declined 3% to $1.74 billion in the quarter, reflecting lower licensing costs.
2016 Results
Full-year sales rose 1% to $39.8 billion, slightly missing the Zacks Consensus Estimate of $39.9 billion. Revenues were, however, within the guided range of $39.7–$40.2 billion.
Adjusted earnings for 2016 were $3.78 per share, up 5.3% year over year and above the Zacks Consensus Estimate of $3.77. Earnings were in line with the higher end of the projected range of $3.71 to $3.78.
2017 Guidance
Merck issued its 2017 earnings and revenues guidance. The company expects earnings in the range of $3.72–$3.87 per share, including approximately 2% negative foreign exchange impact. Excluding currency headwinds, 2017 EPS growth is expected in a range of flat to up 4%.
Merck expects revenues in a range of $38.6 billion to $40.1 billion, including negative currency impact of approximately 2%. The sales guidance fell slightly short of the then Zacks Consensus Estimate of $40.17 billion.
Adjusted gross margin is expected to increase moderately in 2017 versus 2015 despite the negative impact of a 6.5% royalty on global sales of Keytruda to Bristol Myers
Operating expenses are expected to increase at a low single-digit rate, driven by an increase in R&D spending, while marketing and administrative expenses are anticipated to be relatively flat.
While sales of drugs that have lost patent exclusivity will continue to decline rapidly, the full benefit of the ramp from new product launches, such as Keytruda and Zepatier will be realized only from the second half of 2017. Meanwhile, operating expenses are expected to be higher in the first half largely due to higher promotional expense for Keytruda and the phasing of clinical spend.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared with three lower.
Merck & Company, Inc. Price and Consensus
Merck & Company, Inc. Price and Consensus | Merck & Company, Inc. Quote
VGM Scores
At this time, Merck stock has a Growth Score of 'B', however its Momentum is lagging a bit with a 'D'. Following the exact same course, the stock was allocated also a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the company's stock is more suitable for growth investors than value investors.
Outlook
Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.