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Merck (MRK) to Report Q3 Earnings: What's in the Cards?

Merck & Co., Inc. MRK will report third-quarter 2018 results on Oct 25, before market open. In the last reported quarter, the company delivered a positive earnings surprise of 2.91%.

Merck’s performance has been pretty impressive, with the company exceeding earnings expectations in all the trailing four quarters. The average positive earnings surprise over the last four quarters is 5.25%

Merck & Co., Inc. Price and EPS Surprise

 

Merck & Co., Inc. Price and EPS Surprise | Merck & Co., Inc. Quote

Merck’s shares have risen 28.6% this year so far compared with a 6% increase for the industry.

 

 

Let’s see how things are shaping up for this announcement.

Factors to Consider

Merck’s relatively newer products like cancer drug Keytruda, Gardasil vaccine and Bridion Injection are likely to drive the top line this quarter. Alliance revenues from Lynparza and Lenvima are also expected to boost sales.

However, loss of market exclusivity for several drugs, softness in the diabetes (Januvia/Janumet) franchise and lower sales of key products like Zostavax and Zepatier due to competitive pressure may hurt sales.

Keytruda sales are likely to benefit from the launch of new indications globally. Keytruda sales are gaining particularly from strong momentum in the indication of first-line lung cancer as it is the only anti-PD-1 approved in the first-line setting.

In the quarter, Keytruda gained FDA and EU approval to include overall survival data from a key late-stage lung cancer study, KEYNOTE-189 study on its label. It was also approved in China for advanced melanoma. These label expansion approvals are expected to drive sales of Keytruda in the future quarters.

Strong demand in most markets is driving sales of Bridion (sugammadex) Injection – a trend we expect to see in the third-quarter results as well. Bridion was launched in China in the third quarter, which can bring in additional sales.

Rising competitive pressure is hurting sales of relatively newer drugs like Zostavax and Zepatier. Sales of Zepatier are going down sharply on reduction in patient volume due to increasing competition. On the second-quarter call, Merck had warned that the negative trend will continue through the rest of 2018.

Among the older products, while continued pricing pressure is hurting sales of the diabetes franchise (Januvia/Janumet), lower demand in the United States and competitive pricing pressure in Europe are hurting sales of Isentress.

Among the vaccines, Zostavax sales will be hurt by strong competition from Glaxo’s GSK newly approved shingles vaccines, Shingrix. Gardasil/Gardasil 9 sales are likely to be driven by strong performance in outside U.S. markets, which is likely to make up for softer volumes in the United States due to continued transition to two-dose regimens. However, on the second-quarter call, the company had said that transition to the two-dose regimens in the United States is nearly complete and the vaccine is seeing strong underlying demand trends in the country. It remains to be seen if Gardasil/Gardasil 9’s U.S. sales improve in the third quarter. The Zacks Consensus Estimate for total vaccine sales is $2.13 billion.

Animal health franchise sales are likely to be solid in the third quarter. The Zacks Consensus Estimate for Animal Health segment sales is $1.12 billion.

Meanwhile higher R&D costs due to increased clinical spending for the development of Lynparza and Lenvima and investment in early drug development will hurt profits.

In August, Merck gained FDA approval for two new HIV drugs — Pifeltro and Delstrigo — containing doravirine. We expect management to discuss launch plans for the drug on the third quarter conference call.

Earnings Whispers

Our proven model does not conclusively show that Merck will beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Earnings ESP: Its Earnings ESP is -0.06%. The Zacks Consensus Estimate is $1.15. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Merck’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some large biotech/drug stocks worth considering per our model. These have the right combination of elements to beat on earnings this time around:

Bristol-Myers Squibb Company BMY has an Earnings ESP of +0.73% and a Zacks Rank of 1. The company is scheduled to report second-quarter earnings on Oct 25. You can see the complete list of today’s Zacks #1 Rank stocks here.

Amgen, Inc. AMGN is slated to announce financial figures on Oct 30. The company has an Earnings ESP of +0.56% and is a Zacks #2 Ranked stock.

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