A month has gone by since the last earnings report for Merck (MRK). Shares have lost about 3.8% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.
Merck Q4 Earnings & Sales Miss
Merck reported fourth-quarter 2020 adjusted earnings of $1.32 per share, which missed the Zacks Consensus Estimate of $1.36. Earnings rose 14% year over year (up 17% excluding the impact of currency) aided by higher revenues and lower promotional and selling costs in the quarter.
Including charges related to acquisitions and intangible asset impairment, loss per share was 83 cents against earnings of 92 cents in the year-ago quarter.
Revenues increased 5% year over year (both on reported and constant currency basis) to $12.51 billion. Sales however missed the Zacks Consensus Estimate of $12.59 billion.
Quarter in Detail
The Pharmaceutical segment generated revenues of $11.4 billion, up 8% (up 6% excluding Fx impact) year over year driven by strong demand for cancer drugs. However, reduced wellness visits and delayed procedures due to the pandemic and generic competition for legacy drugs partially offset the growth. COVID-19 related business disruptions hurt Merck’s fourth-quarter pharmaceuticals revenues by $400 million, mostly vaccines.
Keytruda, the largest product in Merck’s portfolio, generated sales of $3.99 billion in the quarter, up 27% (excluding Fx impact) year over year. Keytruda sales have been gaining particularly from continued strong momentum in lung cancer indications and continued uptake in newer indications. However, the impact of COVID-19 and pricing pressure in Japan offset the growth to an extent.
The launch of the six-week dosing regimen also benefited Keytruda sales in the United States. Outside U.S., lung cancer indications remain the driver of Keytruda growth.
Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter.
Lynparza alliance revenues increased 53% year over year to $206 million in the quarter driven by continued uptake across the multiple approved indications in the United States, the EU and China. Lenvima alliance revenues were $158 million, up 26% from the year-ago period.
In the hospital specialty portfolio, Bridion Injection generated sales of $355 million in the quarter, up 13% year over year, as market share gains were partially offset by lower elective surgery procedures.
In vaccines, Gardasil/Gardasil 9 sales rose 41% year over year to $998.0 million. The sales increase reflected the impact from the $120-million CDC stockpile replenishment in the quarter and the initial $120 million borrowing in the fourth quarter of 2019, which had a combined positive impact of $240 million year over year. Higher demand in China also benefited sales, which were partially offset by the impact of the pandemic.
Proquad, M-M-R II and Varivax vaccines recorded combined sales of $488 million, up 1% year over year. Rotateq vaccine sales declined 14% to $196 million. Sales of Pneumovax 23 vaccine were flat at $339 million.
Pharmaceutical sales were hurt by loss of U.S. market exclusivity for drugs like Nuvaring and Zetia.
Zetia sales declined 36% to $98 million. NuvaRing sales were $53 million, down 70% year over year. Remicade sales declined 5% year over year to $88 million in the quarter.
Januvia/Janumet (diabetes) franchise sales declined 7% year over year to $1.33 billion, reflecting continued pricing pressure in the United States, which offset the strong demand from certain international markets. Sales of Isentress declined 6% to $211 million.
Merck’s Animal Health segment generated revenues of $1.17 billion, up 4% from the year-ago quarter. Excluding the impact of currency, sales rose 6% helped by one-time benefits like an additional month of sales in the quarter and contribution from smaller acquisitions, which partially offset the impact of unfavorable distributor purchasing patterns.
Sales of companion animal products rose 9%, driven by higher demand in companion animal vaccines and parasiticides. Sales of Livestock products rose 4% as an extra month of sales from the acquisition of Antelliq were partially offset by distributor purchasing patterns.
Adjusted gross margin was 73%, up 40 basis points from the year-ago quarter driven by the favorable impact of product mix and manufacturing variances, which offset the negative impact of higher inventory write-offs (due to a recall of Zerbaxa) and pricing pressure.
Selling, general and administrative (SG&A) expenses were $2.8 billion in the reported quarter, down 2% year over year driven by lower selling and administrative costs due to lower travel costs as a result of the pandemic. Research and development (R&D) spend rose 12% to $2.6 billion due to higher clinical development costs and incremental spend to advance COVID-19 research programs.
COVID-19 favorably impacted spending by approximately $50 million.
Full-year 2020 sales rose 4% to $48.0 billion, missing the Zacks Consensus Estimate of $48.09 billion by a slight margin. Sales were within the guided range of $47.6 billion-$48.6 billion.
Adjusted earnings for 2020 were $5.94 per share, which missed the Zacks Consensus Estimate of $5.97. Earnings were within the guided range of $5.91-$6.01. Earnings were up 14% year over year.
In 2021, Merck expects revenues to be in the range of $51.8 billion-$53.8 billion, which indicates growth of 8% to 12% versus 2020. This includes a positive currency impact of 2%. The guidance excludes any revenues from COVID-19 therapeutics.
Adjusted earnings are now expected to be in the range of $6.48-$6.68, which implies growth of 12% to 15% versus 2020. This includes a positive currency impact of 3%.
Adjusted operating costs are expected to be higher than 2020 by a high-single to low-double-digit rate. Costs related to development of its COVID-19 antiviral candidates are expected to increase R&D expenses in the year.
The guidance assumes that Organon business will be part of Merck for all of 2021. Once the spin-off is completed in late second quarter, Merck will update its guidance. Adjusted tax rate is expected to be in the range of 15.
COVID-19 hurt Merck’s sales by $2.5 billion in 2020, mostly the pharmaceuticals business. Merck expects some residual negative impacts from COVID-19 in 2021. COVID-19 related business disruptions are expected to hurt Merck’s sales in 2021 by 2% or roughly $1 billion, mainly vaccines in the United States. The impact, all of which relates to pharmaceutical segment sales, is expected to hurt mostly first-half sales.
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.