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Merck (MRK) Q3 Earnings Top, Sales Lag, Keytruda Stays Strong

Merck & Co., Inc. MRK reported third-quarter 2017 adjusted earnings of $1.11 per share, which beat the Zacks Consensus Estimate of $1.03 by 7.8%. Earnings rose 3.7% year over year.

Among other items, adjusted earnings exclude a charge related to its new oncology collaboration with Britain's AstraZeneca AZN.

Revenues for the quarter declined 2% year over year to $10.33 billion. Sales also missed the Zacks Consensus Estimate of $10.51 billion. Currency movement positively impacted revenues by 1%. Excluding currency impact, sales declined 3% year over year.

Lost sales in some markets due to a network cyber-attack in June hurt the top line in the quarter. Meanwhile, unfavorable comparisons with the third quarter of last year hurt sales.

Quarter in Detail

The Pharmaceutical segment generated revenues of $9.2 billion, down 3% (down 4% excluding Fx impact) year over year as continued strong sales of PD-1 inhibitor, Keytruda were offset by lower sales of key products like diabetes drug Januvia and HPV vaccine Gardasil/Gardasil 9. As in the previous quarters, loss of market exclusivity for several drugs also hurt the top line.

Keytruda brought in sales of $1.05 billion in third-quarter 2017, up 21% sequentially and 194% year over year. Sales continued to be driven by the launch of new indications globally. Keytruda sales are gaining particularly from strong momentum in the indication of first-line lung cancer.

Keytruda is already approved for many types of cancers and treatment settings including lung cancer, melanoma, head and neck cancer, classical Hodgkin’s lymphoma and bladder cancer.

Meanwhile, the Keytruda development program significantly advanced in the first half with regulatory approvals for four new indications in the United States and an additional indication in Europe. Key recent approvals include that for advanced bladder cancer, advanced microsatellite instability-high cancers and first approval as a combination therapy with Eli Lilly’s LLY cancer drug Alimta (pemetrexed) and carboplatin (pem/carbo) in lung cancer.

The new approvals have expanded the patient population, which we believe drove sales in the third quarter.

Zepatier brought in sales of $468 million, down from $517 million in the previous quarter.

Bridion (sugammadex) Injection generated sales of $185 million in the quarter, up 33% year over year, driven by the strong uptake following its launch in the United States.

Meanwhile, combined sales of Remicade (lost exclusivity in Europe and facing stiff biosimilar competition in the region), Cubicin (lost patent protection in the United States in June 2016), Zetia (lost market exclusivity in the United States in December 2016) and Vytorin (lost U.S. exclusivity in April 2017) declined $800 million in the quarter.

Remicade sales declined 31% to $214 million in the quarter. Merck markets the branded version of Remicade outside the United States while Johnson & Johnson JNJ markets the rheumatoid arthritis drug within the country.

Cubicin sales plunged 71% to $91 million in the quarter. The Zetia/Vytorin franchise recorded sales of $462 million, down 51% due to loss of exclusivity for both Zetia and Vytorin.

Sales of Isentress and the Januvia/Janumet (diabetes) franchise also declined in the quarter. The Januvia/Janumet franchise recorded sales of $1.53 billion in the quarter, down 2% from the year-ago quarter due to continued pricing pressure.

Isentress sales declined 17% in the quarter to 310 million. Lower volumes/demand due to competitive pressure hurt sales of Isentress.

Gardasil/Gardasil 9 sales declined 22% to $675 million. The production shutdown following the cyber-attack resulted in supply constraints, which adversely impacted sales in the United States. However sales rose in Europe  boosted by the addition of sales from the terminated vaccine joint venture with Sanofi SNY and in Asia Pacific backed by strong demand.

Merck’s Animal Health segment generated revenues of $1 billion, up 16% (up 14% excluding Fx impact) from the year-ago quarter, primarily driven by higher sales of companion animal products, primarily Bravecto, companion animal vaccines and contribution from the Vallée acquisition.

Gross Margins & Costs Rise                                                  

Adjusted gross margin came in at 76%, up 70 basis points (bps) from the year-ago quarter,, attributable to favorable effects of product mix, which offset the costs related to the cyber attack.

Marketing and administrative (M&A) expenses increased 1% to $2.4 billion in the reported quarter. Research and development (R&D) spend increased 8% to $1.8 billion in the quarter.

2017 Guidance

Merck raised its previously issued adjusted earnings guidance while raising its sales guidance marginally – for the second time this year. The company expects adjusted earnings in the range of $3.91–$3.97 compared with $3.76–$3.88 expected earlier. The adjusted earnings guidance includes less than 1% negative impact from currency fluctuation, comparing favorably with approximately 1% previously.

Revenues are expected in the range of $40.0 billion – $40.5 billion compared with the earlier forecast of $39.4 billion – $40.4 billion, including negative currency impact of less than 1%  (versus approximately 1% previously).

Operating expenses are still expected to increase year over year at a mid-single-digit rate. The increased costs are attributable to increased investments behind the ongoing launches, remediation expenses related to the cyber attack, as well as additional R&D costs associated with the new oncology collaboration with AstraZeneca.

Our Take

Merck’s third-quarter results were mixed as the company beat estimates for earnings but missed the same for sales. Despite a relatively weaker sales performance, Merck raised its previously issued adjusted earnings guidance for 2017 and also upped its sales guidance marginally.

Shares were down 2% in pre-market trading in response to lower sales of Merck’s multiple medicines. This year so far, Merck’s shares have underperformed the industry. Merck’s shares have risen 5.3% this year comparing unfavorably with a 16.1% increase for the industry.

All eyes were on the performance of Keytruda, which is being touted as a key long-term growth driver for Merck. The drug continued its strong performance with sales crossing the $1 billion mark this quarter.

However, the company has suffered some notable pipeline setbacks this year. Earlier this month, Merck decided not to seek approval for its CETP inhibitor anacetrapib for cholesterol management as its clinical profile was not strong enough to support regulatory filings. Last month, Merck discontinued development of two of its HCV programs saying that the HCV market is becoming extremely crowded. Also, three combination studies of Keytruda for multiple myeloma were placed on clinical hold following reports of death in the Keytruda groups in July

Merck carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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