Merck Stock Dips on Disappointing 2023 Outlook

Merck Stock

Merck Stock (NASDAQ:MRK)

Merck (NASDAQ:MRK) announced fourth-quarter 2022 adjusted earnings of $1.62 per share, exceeding both our forecast of $1.50 and the $1.56 Consensus Estimate. Due to rising tax rates, earnings decreased 10% from year to year (7% if currency impact is taken into account).

After adjusting for acquisition and divestiture-related expenses, restructuring charges, income, and losses from investments in equity securities, and a few other variables, earnings per share were $1.18, a 17% (ex FX) decrease year over year.

In terms of constant currency, revenues increased by 8% (or 2%) to $13.83 billion. Sales exceeded both our estimate of $13.48 billion and the $13.74 billion Consensus Estimate.

Merck stock fell 1.9% in pre-market trading. 

Quarter Highlights

Revenues from the pharmaceutical business were $12.18 billion, an increase of 9% from the previous year due to stronger sales of several vaccines and oncology medications.

Keytruda sales, Merck’s largest product, totaled $5.45 billion in the quarter, up 26% from the same period the previous year (excluding the impact of foreign exchange). Keytruda sales increased as a result of the drug’s persistently high momentum in metastatic indications, which included quick uptake across recent earlier-stage launches and some forms of NSCLC renal cell carcinoma, head and neck squamous cell carcinoma, TNBC, and MSI-H malignancies. Keytruda sales fell short of both our $5.62 billion prediction and the $5.57 billion Consensus Estimate.

Lagevrio (molnupiravir), the company’s COVID-19 medicine, went from $436 million to $825 million in the fourth quarter. Sales for Lagevrio exceeded both our forecast of $440 million and the $395 million Consensus Estimate. A fall in sales in the United States was offset by increases in Japan and the United Kingdom.

Oncology sales in the third quarter were also boosted by alliance revenues from Lynparza and Lenvima. For the co-development and commercialization of the PARP inhibitor Lynparza, Merck has an agreement with the British pharmaceutical behemoth AstraZeneca, and it has a comparable agreement with Eisai for the tyrosine kinase inhibitor Lenvima.

Lynparza alliance revenues from AstraZeneca’s cooperation increased 14% year on year to $292 million in the third quarter due to increased demand. Revenue from the Lenvima alliance climbed 9% year on year to $216 million.

Bridion injection, a neuromuscular blocker drug, earned sales of $441 million in the hospital specialty portfolio during the third quarter, up 7% from the same period last year.

Sales of the HPV vaccinations Gardasil and Gardasil 9 climbed by 6% year on year in the vaccines sector to $1.47 billion, as strong demand in non-US countries, particularly China, more than offset reduced sales in the US due to the CDC’s poor scheduling. Sales of Gardasil fell short of the $1.5 billion Consensus Projection but marginally exceeded our $1.45 billion estimate.

Sales of the vaccinations Proquad, M-M-R II, and Varivax were $526 million, an increase of 6% over the previous year. Rotateq, the rotavirus vaccine, saw revenues fall 31% to $139 million. Pneumovax 23 (a polyvalent pneumococcal vaccination) sales fell by half to $145 million due to a downturn in demand in the American market. Due to inventory stocking in the US, sales of Merck’s new Vaxneuvance 15-valent pneumococcal conjugate vaccine were $138 million.

Franchise sales for the diabetes medication Januvia/Janumet decreased 29% year over year to $913 million. Lower demand and pricing caused by generic competition hampered pharmaceutical sales in various international countries. In China and the European Union, the medications’ market exclusivity expired in July and September of last year, respectively.

Due to currency challenges, Merck’s Animal Health sector had revenues of $1.23 billion, a 2% year-over-year decline. Sales increased 6% in the quarter excluding the effects of foreign exchange, with greater sales of livestock products slightly offsetting lower sales of companion animal items. Sales for the Animal Health segment fell short of the $1.27 billion Consensus Estimate.

The positive effects of currency and product mix led to an adjusted gross margin of 75.7%, an increase of 90 basis points from the previous year.

Selling, general, and administrative (SG&A) costs were $2.6 billion in the reported quarter, up 1% from the same period last year as a result of higher administrative costs and increased promotional spending. Spending on research and development (R&D) was $3 billion, up 14% from the previous year.

Full-Year Results for 2022

Sales for the entire year 2022 increased 22% (26% ex FX) to $59.28 billion, barely surpassing both the guidance range of $58.5-$59.0 billion and the Consensus Estimate of $59.19 billion. To $52.0 billion, pharmaceutical sales increased by 22%.

Adjusted earnings for 2022 increased by 43% to $7.48 per share. Earnings were above both the recommended range of $7.32 and $7.37 and the $7.40 per share Consensus Estimate.

2023 Outlook 

Merck released an updated forecast for its 2023 sales and earnings.

In 2023, Merck anticipates revenues to be between $57.2 and $58.7 billion. The $58.5 billion Consensus Estimate.

Sales for Lagevrio are projected to total $1.0 billion in 2023, a sharp decrease from $5.7 billion in 2022.

Adjusted profits per share are anticipated to range from $6.80 to $6.95, falling short of the $7.16 per share Consensus Estimate.

The forecast accounts for a negative foreign exchange effect of about 2% on sales and 4% on profitability.

It is anticipated that the adjusted gross margin will be around 77%.

Adjusted operating expenses are anticipated to fall between $23.1 and $24.1 billion. The adjusted tax rate is anticipated to range between 17% and 18%.

Our View

Results for Merck’s fourth quarter were better than anticipated, surpassing forecasts for both profitability and sales. The COVID-19 antiviral medication Lagevrio sold better than anticipated thanks to increased demand outside of the U.S. market. Sales of the cancer medication Keytruda and the Gardasil vaccine increased in the quarter, but they fell short of our projections. The projection for Merck’s annual profits fell short of market expectations.

Compared to the industry’s 9.2% growth over the past year, Merck stock has increased 35.4%.

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About the author: Stephanie Bedard-Chateauneuf has over four years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on consumer stocks, cannabis stocks, tech stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.