Merck & Co., Inc. MRK reported second-quarter 2020 adjusted earnings of $1.37 per share, which beat the Zacks Consensus Estimate of $1.14. Earnings rose 6% year over year (up 9% excluding the impact of currency) helped by lower SG&A costs and higher other income as revenues declined in the quarter.

Including acquisition and divestiture-related costs, restructuring costs and certain other items, earnings per share were $1.18, up 15% year over year.

Revenues declined 8% year over year (down 5% excluding currency impact) to $10.87 billion. Sales also missed the Zacks Consensus Estimate of $10.92 billion. Sales of several of Merck’s medicines were hurt due to social distancing measures, fewer patient visits and delays in elective surgeries due to COVID-19.

Quarter in Detail

The Pharmaceutical segment generated revenues of $9.68 billion, down 7% (down 6% excluding Fx impact) year over year due to negative impact of the COVID-19 pandemic on vaccines and hospital acute care products and lower sales of several legacy products due to loss of market exclusivity. However, oncology products, including Keytruda, did well in the quarter.

Keytruda, the largest product in Merck’s portfolio, generated sales of $3.39 billion in the quarter, up 29% year over year. Keytruda sales have been gaining particularly from continued strong momentum in first-line lung cancer indication and continued uptake in newer indications.

Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter, reflecting continued uptake in approved indications in the United States, Europe and China. Merck has a deal with Swiss pharma giant AstraZeneca AZN to co-develop and commercialize PARP inhibitor, Lynparza and a similar one with Japan’s Eisai for tyrosine kinase inhibitor, Lenvima.

Lynparza alliance revenues were $178 million in the quarter compared with $145 million in the previous quarter. Lenvima alliance revenues were $151 million compared with $128 million in the previous quarter.

In the hospital specialty portfolio, Bridion Injection generated sales of $224 million in the quarter, down 19% year over year, due to the widespread reduction in elective surgeries amid coronavirus-related mobility restrictions.

In vaccines, Gardasil/Gardasil 9 sales declined 26% year over year to $656 million as COVID-19 hurt sales of the vaccine, particularly in the United States and Hong Kong.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $378 million, down 44% year over year due to lower demand. Rotateq vaccine sales declined 2% to $168 million.

Pharmaceutical sales were hurt by loss of U.S. market exclusivity for Remicade, Noxafil, Emend, Cubicin, Nuvaring and Vytorin.

Remicade sales declined 26% year over year to $73 million in the quarter. Merck markets Remicade in partnership with J&J JNJ.

Zetia/Vytorin sales were $175 million, down 24% from the year-ago quarter due to loss of exclusivity for both drugs. NuvaRing sales were $63 million, down 74% year over year.

Januvia/Janumet (diabetes) franchise sales declined 7% year over year to $1.34 billion due to continued pricing pressure in the United States. Sales of Isentress declined 21% to $196 million.

Merck’s Animal Health segment generated revenues of $1.1 billion, down 2% from the year-ago quarter. However, excluding the impact of currency, sales rose 3%, helped by an additional month of sales related to the acquisition of Antelliq. Sales of animal health products were hurt due to reduced veterinary visits and decreased protein and milk consumption due to restaurant and school closures

Margin Discussion

Adjusted gross margin was 73.8%, down 160 basis points from the year-ago quarter due to unfavorable manufacturing variances and higher amortization of intangible assets, which were partially offset by favorable product mix.

Selling, general and administrative (SG&A) expenses were $2.2 billion in the reported quarter, down 16% year over year driven by lower selling and administrative costs due in part to the COVID-19 pandemic and currency tailwinds. Research and development (R&D) spend rose 1% to $2.2 billion.

Lifts 2020 Outlook

Merck raised its sales and earnings guidance for 2020 to reflect lower- than-previously-expected impact of COVID-19 and currency.

It expects revenues to be in the range of $47.2 billion-$48.7 billion, higher than the earlier guided range of $46.1 billion-$48.1 billion. COVID-19 related business disruptions are expected to hurt Merck’s 2020 revenues by $1.95 billion (previously $2.1 billion), comprising approximately $1.8 billion headwind for pharmaceuticals and approximately $150 million for Animal Health.

The new guidance includes a negative currency impact of approximately 2% versus prior expectation of a negative impact of approximately 2.5%.

Adjusted earnings are now expected to be in the range of $5.63-$5.78 compared with $5.17$5.37 guided previously. This includes a negative currency impact of approximately 3%, compared with approximately 3.5% expected previously.

Coronavirus Related Research Efforts

Merck announced three deals in the quarter to find new medicines and vaccines to help combat COVID-19. First, Merck acquired Austrian private biotech, Themis, in June. Themis has a COVID-19 vaccine candidate, V591, in preclinical development with clinical studies expected to start in the third quarter. Themis developed the candidate using its measles virus vector platform. Second, Merck is co-developing private biotech, Ridgeback Biotherapeutics’ oral antiviral candidate, MK-4482 (previously EIDD-2801), which is being evaluated in phase II studies for the treatment of COVID-19. Third, Merck in collaboration with a non-profit research organization, IAVI, is co-developing, V590, a vaccine to prevent COVID-19 using its rVSV platform, which was used to make its Ebola vaccine.

Our Take

Merck’s second-quarter results were mixed as the company beat estimates for earnings but missed the same for sales. COVID-19 related business disruptions hurt Merck’s second quarter revenues by $1.6 billion, comprising approximately $1.5 billion headwind for pharmaceuticals and approximately $100 million for Animal Health. Mainly COVID-19 hurt sales of Bridion and Merck’s vaccines, including Gardasil. However, blockbuster cancer drug, Keytruda continued to do well and provided top-line support.

The company raised its earnings and sales guidance for the year, which pushed its shares up almost 3% in pre-market trading. Merck’s stock has declined 13.2% this year so far against an increase of 1.1% for the industry

Moreover, Merck said that the majority of the COVID-19 related negative impact occurred in the second quarter with a gradual recovery beginning toward the end of the second quarter. Merck expects normal business operations to resume in the fourth quarter.

Zacks Rank

Merck currently carries a Zacks Rank #3 (Hold). A better-ranked large cap stock is Roche RHHBY, carrying a Zacks Rank #2 (Buy). Its earnings estimates have risen from $2.60 per share to $2.63 per share for 2020 and from $2.77 per share to $2.81 per share for 2021 over the past 60 days. The stock has gained 9.2% this year so far.

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