Company overview - Merck & Co., Inc. is a global healthcare company. The Company offers health solutions through its prescription medicines, vaccines, biologic therapies and animal health products. It operates through four segments: Pharmaceutical, Animal Health, Healthcare Services and Alliances. The Company's Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells its human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed healthcare providers, such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices.


MRK Details

For quite some time, Merck & Co. (NYC: MRK) has been struggling to mitigate the pressures on the stock owing to factors of the macro environment and challenges against top line growth. However, the recent updates on financial performance, promising products, development pipeline, strategic collaborations and greenback reversal are expected to pave the way for growth prospects.

Q2FY17 driven by robust momentum for KEYTRUDA: Merck had reported 1% year on year (yoy) revenue growth for Q2FY17 and H1FY17 at $9.9 billion and $19.4 billion, respectively.  Sales growth in both periods was driven by higher sales in the oncology franchise largely from Keytruda, the ongoing launch of hepatitis C virus (HCV) treatment Zepatier, and growth in vaccine products including Gardasil (Human Papillomavirus Quadrivalent Vaccine, Recombinant)/ Gardasil and Pneumovax 23 (pneumococcal vaccine polyvalent). Further, during H1FY17, revenues benefited from the December 31, 2016 termination of Sanofi Pasteur MSD (SPMSD), a joint venture between Merck and Sanofi Pasteur S.A. (Sanofi), which marketed vaccines in most major European markets. Additionally, the increase was led by the favourable product mix and lower inventory write-offs during the period. On the expenses side, Q2FY17 marketing and administrative expenses declined 1% yoy to $2.4 billion compared to previous corresponding period, led by lower restructuring costs partially offset by higher administrative costs including costs associated with its European vaccines business in the countries that were part of the terminated SPMSD vaccines joint venture, and higher promotion expenses related to product launches.


Consolidated income statement ($ in millions except per share amounts); (Source: Company reports)

Product launches and vaccines drove Pharmaceutical Revenue: Revenue from pharmaceutical segment increased 1% yoy to $8.8 billion, driven by product launches and vaccines, largely offset by the loss of market exclusivity for several products, as well as lower sales in the diabetes franchise. Importantly, growth in oncology was led by higher sales of KEYTRUDA as the company continues to launch the product with new indications globally. Further, strong momentum from NSCLC (Non-Small Cell Lung Cancer) as KEYTRUDA is the only anti-PD-1 approved in the first-line setting, contributed significantly to KEYTRUDA’s overall growth. Growth in hepatitis C was driven by ZEPATIER (elbasvir and grazoprevir) due to on-going launches globally. Further, the on-going launch of BRIDION (sugammadex) Injection 100 mg/ml (for the reversal of neuromuscular blockade induced by rocuronium bromide or vecuronium bromide in adults undergoing surgery) contributed to overall revenue by generating $163 million in sales.


Sales from top pharmaceutical products and Animal Health products; (Source: Company reports)

Vaccines growth led by strong demand in Asia Pacific and Brazil: Growth in vaccines was primarily driven by higher sales of GARDASIL [Human Papillomavirus Quadrivalent Vaccine, Recombinant] and GARDASIL 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), vaccines to prevent certain cancers and other diseases caused by HPV, with strong demand in Asia Pacific and the timing of sales in Brazil. Further, growth was strengthened by higher sales of PNEUMOVAX 23 (vaccine to help prevent pneumococcal disease), largely driven by volume growth and pricing in the United States. Additionally, vaccines sales growth reflects incremental sales of approximately $70 million, of which approximately $40 million relates to GARDASIL and GARDASIL 9, due to the recording of vaccine sales from 19 European countries that were part of the Sanofi Pasteur MSD (SPMSD) vaccines joint venture, which was terminated in 2016.


On the other hand, revenue from the diabetes franchise of JANUVIA and JANUMET (sitagliptin and metformin HCl) declined, primarily due to lower sales in the United States with continued pricing pressure and lower customer inventory levels that were partially offset by volume growth. Moreover, pharmaceutical sales growth was further offset by the loss of U.S. market exclusivity for ZETIA (ezetimibe) in late 2016 and VYTORIN (ezetimibe/simvastatin) in April 2017 coupled with on-going impacts of generic competition for CUBICIN (daptomycin for injection), and bio similar competition for REMICADE (infliximab) in the company’s marketing territories in Europe. In the aggregate, sales of these products declined $830 million during the second quarter of 2017 compared to the second quarter of 2016.

Growth in Animal Health Revenue: Animal Health sales grew 6% yoy to $955 million, primarily due to rise in companion animal products, driven by the BRAVECTO (fluralaner) line of products that kill fleas and ticks in dogs and cats for up to 12 weeks, and the NOBIVAC Canine Flu Bivalent vaccine, as well as sales increases in ruminants’ products, led by the positive impact of the Vallée S.A. acquisition.


Segment profits to Income before taxes; (Source: Company Reports)

Breakthrough Therapy Designation for KEYTRUDA: MRK crossed a key milestone in the development program for KEYTRUDA (pembrolizumab) by receiving vital regulatory approvals and a supplemental Biologics License Application (sBLA) acceptance. The U.S. Food and Drug Administration (FDA) approved KEYTRUDA under its Accelerated Approval program in combination with pemetrexed and carboplatin for the treatment of patients with metastatic nonsquamous non-small cell lung cancer (NSCLC) regardless of PD-L1 expression. Notably, this is the first regulatory approval of KEYTRUDA in combination with another treatment and FDA granted Breakthrough Therapy Designation for KEYTRUDA in combination with axitnib as a first-line treatment for patients with advanced or metastatic renal cell carcinoma. Further, the National Cancer Care Network (NCCN) also recommended the combination for the treatment of patients with metastatic nonsquamous NSCLC. The European Commission approved KEYTRUDA for the treatment of adult patients with relapsed or refractory classical Hodgkin lymphoma, who have failed autologous stem cell transplant and brentuximab vedotin (BV), or who are transplant-ineligible and have failed BV.

Update on KEYNOTE-040: MRK previously announced that the pivotal Phase 3 KEYNOTE-040 trial investigating KEYTRUDA in previously treated patients with recurrent or metastatic head and neck squamous cell carcinoma did not meet its primary endpoint of overall survival. However, the safety profile observed in KEYNOTE-040 was consistent with that observed in previously reported studies of KEYTRUDA without new safety signals identified. The primary efficacy analysis did not show a statistically significant improvement in overall survival, but the data added to the evolving science for KEYTRUDA in head and neck cancer.
 

Progress made in the last 5 years since KEYTRUDA entered the clinic; (Source: Company reports)
 
Phase 3 results from the REVEAL met primary endpoint: REVEAL (Randomized EValuation of the Effects of Anacetrapib through Lipid modification) outcomes met its primary endpoint by significantly reducing major coronary events (coronary death, myocardial infarction, and coronary revascularization) compared to placebo in patients at risk for cardiac events. The safety profile of anacetrapib in the early analysis was generally consistent with that demonstrated in previous studies of the drug, including accumulation of anacetrapib in adipose tissue. However, Merck plans to review the results of the trial with external experts, and will consider whether to file new drug applications with the FDA and other regulatory agencies.

Oncology collaboration with AstraZeneca: Off late, Merck entered into global strategic oncology collaboration with AstraZeneca to co-develop and co-commercialize AstraZeneca’s Lynparza (olaparib), and investigational medicine selemetinib (a MEK inhibitor) in combination treatments for multiple cancer types. As part of the program, Merck and AstraZeneca will independently develop and commercialize Lynparza and selumetinib in combinations with the company’s respective PD-1 and PD-L1 immuno-oncology medicines KEYTRUDA and Imfinzi (duralumin). Accordingly, the companies will share development and marketing costs equally, as well as gross profits from Lynparza and selumetinib.


Products in-scope; (Source: Company reports)

Disruption of worldwide operations due to cyber-attack: On June 27, 2017, the company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. While the company does not yet know the magnitude of the impact of the disruption, it continues to work to minimize the effects. The company has largely restored its packaging operations and has partially restored its formulation operations. Further, it is in the process of restoring its Active Pharmaceutical Ingredient operations but is not yet producing bulk product. The company is confident of supplying key products such as KEYTRUDA, JANUVIA and ZEPATIER. Although, it does not expect a significant impact to sales of its other top products; however, anticipates that it will have temporary delays in fulfilling orders for certain other products in some markets.

FY17 Guidance: For FY17, MRK has narrowed and raised its full-year 2017 revenue range to be between $39.4 billion and $40.4 billion while reducing 2017 GAAP EPS range to be between $1.60 and $1.72 due to the inclusion of licensing expenses related to the collaboration with AstraZeneca. However, it has maintained its full-year 2017 non-GAAP EPS range to be between $3.76 and $3.88 as it does not include the acquisition and divestiture-related costs, costs related to restructuring programs and other items. However, it includes an approximately 1% negative impact from foreign exchange at mid-July 2017 exchange rates.


2017 financial guidance; (Source: Company reports)
 
Stock performance: The stock has delivered subdued returns at 2.3% in the last six months while it is up over 5% in the past one year as on September 14, 2017, partially owing to losses from forex translation in the past few years as significant portion of the company’s revenues and earnings in foreign affiliates are exposed to changes in foreign exchange rates. However, the weak dollar in FY17 provides opportunity for additional growth. Importantly, the surge in KEYTRUDA revenue growth and Zepatier are expected to continue while offsetting the revenue decline in other generic drugs. Further, global strategic oncology collaboration with AstraZeneca augurs well for the company as it aids in the product portfolio diversification in Oncology segment. Given the ongoing developments and clinical trials of KEYTRUDA for multiple cancer types, and key collaborations and driving factors, we give a “Buy” recommendation on the stock at the current market price of $65.45


MRK Daily chart; (Source: Thomson Reuters)
 

 
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