Merck Earnings Preview

-7.29%
Downside
132
Market
122
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MRK
Merck

Merck (NYSE:MRK) will release its Q4 2014 earnings on February 4th. The company will continue its battle against the revenue decline which has intensified in recent years due to strong competition from generics. Even though its diabetes and immunology franchises have been trying to make up for the revenue shortfall, they may not be able to carry the weight for much longer. We expect the sales to be down in the upcoming quarter, even though immunology and diabetes drug sales will grow. There may be a mild uptick in Vytorin sales due to positive results from Merck’s IMPROVE-IT trial, but it may not be enough to make a difference. With its acquisition of Idenix this year, and the recent approval of cancer drug Keytruda, the company has kept investors’ hopes alive. There is a chance that Keytruda may be approved for additional conditions, but that won’t happen until later this year.

Our price estimate for Merck stands at $52.50, implying a discount of about 10% to the market.

See our complete analysis for Merck

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Cardiovascular Segment May See Some Help From Vytorin And Zetia

Cardiovascular segment, in general, has been under pressure for Merck and other big pharmaceutical companies as the market has been flooded by generics and R&D productivity has decreased. However, a recent study (the IMPROVE-IT trial) specific to Vytorin, which combines Zetia with a statin drug, has shown its advantage over other drugs in terms of reduced cardiovascular events. This may help slow down the decline in its sales, thus reducing the pressure on Merck’s overall revenue growth. However, the impact will be more clear in the first quarter of 2015.

Diabetes And Immunology Drugs Will Grow, But Moderately

Merck’s Januvia/Janumet (diabetes) franchise’s sales grew by 3.4% during the first nine months of 2014, amounting to $4.35 billion. [1] The segment’s year-over-year growth accelerated slightly in the third quarter. Although there was a sequential decline, it can be attributed to the timing of purchases as the last year showed a similar pattern. The crux is that diabetes franchise is still holding up for Merck, and is likely to continue that trend in the fourth quarter. The longer term outlook is not as rosy, however, as the franchise will likely face strong competition from J&J and Eli-Lilly. The latter is making efforts to comprehensively cover multiple diabetes drug classes.

In the Immunology segment, Remicade and Simponi are doing very well, as evident from 15% growth observed in Merck’s total immunology revenues during the first nine months of 2014. [1] However, the revenues from Remicade haven’t grown much sequentially in 2014, which may be a cause of concern. Also, the drug loses its exclusivity in Europe in 2015, which will again put pressure on Merck’s growth unless its new launches can make up for it.

Legacy Product Sales Will Go Down

Merck’s legacy products are facing declining revenues due to competitive pressure from generics. The company’s legacy pharmaceutical and consumer business revenues have declined from roughly $13.5 billion in 2010 to $12.7 billion in 2013. The trend continued during the first nine months of 2014 and we expect the figure to decline to $11.3 billion for the full year 2014.

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Notes:
  1. Merck’s SEC Filings [] []