New Jersey-based drugmaker and Dow-30 component Merck (MRK Free Merck Stock Report) has reported second-quarter earnings of $0.71 a share, versus $0.43 in the comparable period of 2016. The bottom-line improvement was primarily driven by sharp reductions in R&D (-19%) and production costs (-14%), and to a lesser extent 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 $1.01 a share, versus $0.93 in 2016. The adjusted figure blew past consensus expectations of $0.87, thanks to tighter cost controls and better-than-expected demand for the company's standout immuno-oncology drug, KEYTRUDA. Despite the strong beat, management maintained its full-year adjusted earnings guidance of $3.76-$3.88 a share and reduced its GAAP profit forecast to $1.60-$1.72 (previously $2.51-$2.63) due to the inclusion of licensing expenses related to an agreement with AstraZeneca (AZN). Shares of MRK were trading relatively flat following the release.

In the June period, worldwide revenues advanced 1% year over year, to $9.93 billion. The gain was highlighted by continued strong momentum in the KEYTRUDA franchise (sales +180%) and double-digit growth in lead vaccine asset GARDASIL (+19%), the latter of which benefited from better demand in the Asia-Pacific region, and the timing of sales in Brazil. A solid contribution from still young HEP-C drug ZEPATIER ($517 million) and a 6% increase in animal health sales further bolstered results, helping to offset an 8% decline in the top-grossing JANUVIA/JANUMET diabetes franchise (owing to weakness in the United States) and continued generic erosion in ZETIA/VYTORIN (-45%) and REMICADE (-39%). For full-year 2017, management upped its revenue outlook slightly from $39.1 billion-$40.3 billion, to $39.4 billion-$40.4 billion.

While several of Merck's newer assets have shown promise, the long-term growth story remains centered around KEYTRUDA. After a strong multi-quarter run, the franchise now represents Merck's second-largest revenue generator (behind JANUVIA/JANUMET), and appears poised to be the cornerstone of its portfolio for years to come. The drug was first approved as a treatment for melanoma in 2014, but has since locked up additional approvals for lung, head, and neck cancers. Development efforts for other indications are ongoing and data suggest that annual sales could top $8 billion by 2021. A recently failed drug trial from a rival candidate made by AstraZeneca (see MYSTIC) appears to have reinforced KEYTRUDA's position as a leader in the high-growth immuno-oncology market.

All told, we continue to view MRK as a solid core holding for investors seeking participation in the large pharma 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.