Why Is Merck (MRK) Down 4.8% Since Last Earnings Report?

A month has gone by since the last earnings report for Merck (MRK). Shares have lost about 4.8% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Merck due for a breakout? 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 Q4 Earnings, Misses Sales

Merck reported fourth-quarter 2019 adjusted earnings of $1.16 per share, which beat the Zacks Consensus Estimate of $1.14. Earnings rose 12% year over year.

Including acquisition and divestiture-related costs, restructuring costs and certain other items, earnings per share were 92 cents, up 33% year over year.

Revenues rose 8% year over year (9% excluding currency impact) to $11.9 billion, which missed the Zacks Consensus Estimate of $12.1 billion.

Quarter in Detail

The Pharmaceutical segment generated revenues of $10.53 billion, up 7% (up 8% excluding Fx impact) year over year as higher sales in oncology and hospital business were offset by lower vaccines and diabetes sales. As in the previous quarters, loss of exclusivity (LOE) for several drugs also hurt the top line.

In October, Merck borrowed doses of Gardasil vaccine from U.S. Centers for Disease Control and Prevention’s (CDC) stockpile to support routine vaccinations in the United States, and to free up some manufacturing capacity to make doses for ex-U.S. markets. The stockpile borrowing hurt fourth-quarter sales by approximately $120 million.

Keytruda, the largest product in Merck’s portfolio, generated sales of $3.1 billion in the quarter, up 45% year over year. Sales were driven by the launch of new indications globally. Keytruda sales are gaining particularly from continued strong momentum in first-line lung cancer indication and launch in newer indications namely renal cell carcinoma and adjuvant melanoma. However, sales of Keytruda fell short of the Zacks Consensus Estimate of $3.2 billion.

On the call, the company said that in the United States, Keytruda leads across many indications, including lung, bladder and head and neck cancers. Meanwhile, the company is seeing strong uptake across all patient subgroups for recent launches in metastatic renal cell carcinoma and adjuvant melanoma.

In international markets, Merck witnessed strong uptake in lung cancer indication while seeing positive uptake from early launches in both renal cell carcinoma and adjuvant melanoma in the EU.

Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter. Lynparza alliance revenues were $132 million in the quarter compared with $123 million in the previous quarter driven by further uptake in ovarian cancer. Lenvima alliance revenues were $124 million compared with $109 million in the previous quarter, driven by continued strong demand in first-line hepatocellular carcinoma. Lenvima sales also benefited from the launch of the endometrial carcinoma indication in combination with Keytruda.

In the hospital specialty portfolio, Bridion (sugammadex) Injection generated sales of $313 million in the quarter, up 22% year over year, driven by strong demand in the United States.

Vaccines sales declined in the quarter. In vaccines, Gardasil/Gardasil 9 sales declined 17% year over year to $693 million hurt by the stockpile borrowing discussed above. Excluding the impact of stockpile borrowing, Gardasil/Gardasil 9 sales rose 15% in the quarter driven by continued strong underlying global demand.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $481 million, up 6% year over year. Pneumovax 23 and Rotateq vaccines rose 4% to $334 million and 21% to $227 million, respectively.

Pharmaceutical sales were hurt by generic competition for Remicade in Merck’s marketing territories in Europe and loss of U.S. market exclusivity for Noxafil, Emend, Cubicin, Zetia and Vytorin. Also, a generic version of NuvaRing was launched in the United States, which hurt sales of the drug in the quarter.

Remicade sales declined 27% year over year to $89 million in the quarter. Zetia and Vytorin recorded sales of $146 million and $54 million, down 9% and 35%, respectively from the year-ago quarter due to LOE for both drugs.

Januvia/Janumet (diabetes) franchise sales declined 3% year over year to $1.42 billion due to continued pricing pressure in the United States, which offset the impact of higher demand. Sales of Isentress declined 20% to $223 million.

Merck’s Animal Health segment generated revenues of $1.12 billion, up 8% (up 10% excluding Fx impact) from the year-ago quarter, driven by higher sales of its livestock products, particularly products added from the acquisition of Antelliq.

Margin Discussion

Adjusted gross margin was 72.6%, down 240 basis points from the year-ago quarter due to unfavorable manufacturing variances, higher inventory write-offs and the negative impact of pricing pressure.

Selling, general and administrative (SG&A) expenses were $2.8 billion in the reported quarter, up 8% year over year driven by higher administrative and promotion costs, partially offset by favorable impact of foreign exchange movement. Research and development (R&D) spend rose 12% to $2.4 billion in the quarter due to ongoing clinical studies and cost related to early drug development.

2019 Results

Full-year 2019 sales rose 11% to $46.84 billion, missing the Zacks Consensus Estimate of $47.0 billion. However, sales were within the guided range of $46.5 billion – $47 billion.

Adjusted earnings of $5.19 per share beat the Zacks Consensus Estimate of $5.16 and came ahead of the guided range of $5.12–$5.17. Earnings rose 20% year over year.

Issues 2020 Outlook

Merck expects revenues to be in the range of $48.8 billion – $50.3 billion including a negative currency impact of less than 1%. The revenue guidance range represents 4% to 7% growth versus 2019 level. Adjusted earnings are expected to be in the range of $5.62–$5.77, including a negative currency impact of approximately 1.5%. The earnings guidance indicates year-over-year growth of 8% to 11%.

Adjusted gross margin is expected to be around 75.5%. The company expects adjusted operating expenses to increase year over year at low-single digit rate. Adjusted tax rate is expected to be in a range of 17.5% - 18.5%.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.