New Jersey-based drugmaker and Dow-30 component Merck & Co. (MRK – Free Merck Stock Report) has reported a fourth-quarter GAAP loss of $0.32 a share, versus a $0.22 deficit in the comparable period of 2016. The year-over-year decline can be primarily attributed to a $2.6 billion charge related to changes in U.S. tax legislation, which largely offset higher revenues (+3%) and a significant reduction in R&D expenses (-56%). Meantime, adjusted earnings, which exclude one-time gains, charges, and other nonrecurring items, and are more closely followed by Wall Street, came in at $0.98 a share, versus $0.89 in 2016. The adjusted figure beat consensus expectations of $0.94, thanks to higher demand for the company's standout immuno-oncology drug KEYTRUDA and a narrow gain in the top-grossing JANUVIA/JANUMET diabetes franchise. Management also provided some encouraging 2018 guidance, but shares of MRK were trading slightly lower in a notable down tape.
In the December period, worldwide revenues advanced 3% year over year, to $10.43 billion. The gain was highlighted by continued strong momentum in the KEYTRUDA franchise (+169%) and double-digit growth in lead vaccine asset GARDASIL (+17). The former benefited from recent launches with new indications globally, while that latter was fueled by a commercial entry in China and solid gains in European markets. Merck's blockbuster diabetes franchise JANUVIA/JANUMET also performed well (+1%), and the company saw improved contributions from newer assets like HEP-C drug ZEPATIER (+29%) and recently launched BRIDION (+50%). Higher animal health sales (+11%) was another key catalyst, helping to mitigate the impact of continued generic erosion in cholesterol-lowering drugs ZETIA and VYTORIN (combined -42%). ZETIA lost U.S. market exclusivity in late 2016 and VYTORIN in April, 2017.
For full-year 2018, management is targeting adjusted earnings of $4.08-$4.23 a share, on revenues of $41.2 billion-$42.7 billion, implying annual growth of 3%-6% on both lines. The guidance reflected a modest impact from foreign exchange and compared favorably to consensus expectations calling for $4.11 a share, on revenues of $41.1 billion. Management also noted that it expects to pay roughly $5 billion over eight years for a one-time repatriation tax. Moreover, the company plans to invest $12 billion over five years in capital projects, including $8 billion in the United States.
Merck's long-term growth story remains heavily tied to the continued success of KEYTRUDA. With a string of recent positive developments, the drug has emerged as the favorite in the high-growth immuno-oncology space and peak annual sales estimates have reached as high as $16 billion. While a few of the company's older franchises are likely to face biosimilar pressure in the coming years, we believe KEYTRUDA and other assets in the new product cycle will be sufficient in offsetting generic losses. Our current forecast calls for sales growth of 3%-4% annually over the next three to five years.
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 Company:Merck & 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, Idenix Pharmaceuticals, and Cubist Pharmaceuticals.