Merck’s Q1 Earnings Beat Led By Keytruda, And The Momentum Could Continue In The Near Term

Merck (NYSE:MRK) recently reported its Q1 2019 results, which were above our estimates. This note details the company’s Q1 performance, and Trefis’ forecasts for the full year 2019. You can view our interactive dashboard analysis ~ How Did Merck Fare In Q1, And What Can We Expect From Full Year 2019? for more details on the key drivers of the company’s expected performance.  In addition, you can see more of our data for Healthcare companies here.

How did Merck’s top line fare in Q1, and what’s the forecast for full year 2019?

• Total Revenues for Merck have largely been in the range of $10 billion to $11 billion over recent quarters.
• Revenues grew from $10.04 billion in Q1 2018 to $10.82 billion in Q1 2019.
• The growth can partly be attributed to a 55% surge in Keytruda sales, and the drug will likely continue to drive the near term revenue growth for the company.
• We estimate the revenues to be $44.18 billion for the full year 2019; a figure 5% higher than 2018.

What are Merck’s key sources of revenue?

• Merck generates its revenues from sales of drugs for several indications in different therapeutic areas, including:
  • Oncology
  • Cardiovascular
  • Virology
  • Immunology
• The company also generates revenues from its Animal Health business.
• The company’s near term growth can largely be linked to its blockbuster oncology drug ~ Keytruda ~ which generated over $7 billion in sales in 2018.

How did the Oncology segment fare in Q1 and how much can it grow in 2019?

• Oncology revenue increased from $1.68 billion in Q1 2018 to $2.53 billion in Q1 2019. This can largely be attributed to strong sales growth of Keytruda. This trend should continue in the near term, and drive low teens segment revenue growth to $9.40 billion for the full year.
• Keytruda is witnessing increased acceptance, and it is the leader in the immuno-oncology space. The growth in Q1 was largely led by gains in lung cancer.
• Keytruda sales are seeing strong growth outside the U.S. as well.
• In the U.S., Keytruda was approved for the adjuvant treatment of patients with melanoma with involvement of lymph node(s) following complete resection in Q1 this year. Last month, the drug captured another two approvals ~ expanded monotherapy label for first-line treatment of non-small cell lung cancer (NSCLC), and a combination with Inlyta (axitinib) as first-line treatment for patients with advanced renal cell carcinoma (RCC).
• The drug is expected to garner more approvals for different indications in the future, given it is currently under 11 programs in phase 3 pipeline. This will continue to aid the sales growth for Merck in the near term, and beyond.

How did the Vaccines fare in Q1 and what’s the full year outlook?

• Vaccines revenue increased from $1.49 billion in Q1 2018 to $1.78 billion in Q1 2019, primarily led by higher Gardasil and ProQuad sales.
• Gardasil is a vaccine used for prevention against HPV (human papillomavirus) virus, which has been linked to certain types of cancers, and thus is an important drug.
• The drug will likely see increased sales given the immunization across various countries. Europe, as well as China, will likely drive the drug’s future sales growth.
• Looking at the full year outlook for Vaccines, we expect the growth to be in high single-digits.

How much can the Animal Health segment grow?

• Animal Health segment revenues declined slightly from $1.06 billion in Q1 2018 to $1.03 billion in Q1 2019. While the revenues were up 3% operationally, the growth was more than offset by currency headwinds.
• The overall segment should see steady growth in the near term, led by higher demand for vaccines, as well as poultry products.
• The company is seeing strong sales for its Bravecto line of products. The sales growth will also be aided by its new acquisition of Antelliq.
• We expect the segment sales to grow in low double-digits to $4.67 billion for the full year 2019.

How did the changes in top line impact Merck’s Q1 earnings, and what is the full year outlook?

• Merck’s Q1 earnings of $1.22 per share on an adjusted basis in Q1 were above our estimates, and reflect 16% growth over the prior year quarter.
• The growth in earnings was driven by higher revenues, close to 100 bps improvement in adjusted net income margin, and a lower share count.
• We expect the adjusted earnings to be $4.65 per share for the full year 2019. This reflects 7% growth to the prior year.
• The growth in earnings will likely be led by higher revenues, and lower share count.
• The margins could contract in the near term, as the company spends more on R&D for its phase 3 pipeline. However, the decline in margins will likely be modest, in line with the commentary from the company’s management on the full year outlook.

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