New Jersey-based drugmaker and Dow-30 component Merck (MRK - Free Merck Stock Report) has reported first-quarter earnings of $0.56 a share, versus $0.40 in the comparable period of 2016. The bottom-line improvement was driven by continued reductions in production costs (-16%) and modestly higher revenues (+1%). Meantime, adjusted earnings, which exclude one-time gains, charges, and other nonrecurring items, and are more closely followed by Wall Street, came in at $0.88 a share, versus $0.89 in 2015. While it represented the second-consecutive quarter of decline, the adjusted figure topped consensus expectations by roughly a nickel, thanks to higher gross margins and better-than-anticipated growth in revenues. The revenues gain was due to strength in the oncology, vaccine, and animal health franchises. Given the solid quarter, management raised its 2017 adjusted earnings outlook to $3.76-$3.88 a share (previously $3.72-$3.87). Shares of MRK are trading relatively flat on the release.

In the March period, worldwide revenues advanced 1% year over year, to $9.43 billion. The gain was highlighted by continued momentum in Merck's standout oncology asset KEYTRUDA (sales +137%) and a strong seasonal bump in vaccine franchise GARDASIL (+41%). A solid performance from new Hep-C drug ZEPATIER and a double-digit increase in animal health sales (+13%) further bolstered results, helping to offset generic pressures on several off-patent drugs, including ZETIA/VYTORIN (-35%), REMICADE (-34%), CUBICIN (-67%), and NASONEX (-40%). Softness in the company's top-grossing JANUVIA/JANUMET diabetes franchise was also a drag (sales -5%), due to the timing of purchases in the United States. For full-year 2017, management is guiding for revenues of $39.1 billion to $40.3 billion, which includes a 1.5% negative impact from foreign exchange at mid-April rates.

With Merck facing a significant patent cliff in 2017, continued momentum in the new product cycle and a keen focus on cost controls will be key to offsetting generic erosion. The company's top asset and now second-highest-grossing franchise, KEYTRUDA, will be leaned on heavily. The drug added a few more regulatory approvals to its list during the first quarter and remains one of Merck's most expansive development programs. Current projections suggest KEYTRUDA could top $8 billion in sales by 2021. Another drug expected to make increased contributions is ZEPATIER. The Hep-C treatment (approved in January, 2016) generated $555 million in sales last year and, based on its strong first-quarter performance ($378 million), is poised to reach blockbuster status in 2017.

All told, we continue to view Merck & Co. stock as a solid core holding for investors seeking participation in the large pharmaceutical space. An above-average dividend yield and superior grades for Safety (1) and Financial Strength (A++) should appeal to risk-averse, income-oriented accounts.

About The CompanyMerck & Co. is an international developer, manufacturer, and distributor of pharmaceuticals. Important product names include JANUVIA/JANUMET (type-2 diabetes); ZETIA/VYTORIN (hypercholesterolemia); GARDASIL (vaccine); KEYTRUDA (lung cancer); and REMICADE (arthritis). In 2014, the company made three significant acquisitions: Schering-Plough (January), Idenix Pharmaceuticals (June), and Cubist Pharmaceuticals (December).

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.