Zacks Investment Research



| Merck & Co., Inc. |(MRK – NYSE) |$57.95* |

Note: This report contains substantially new material. Subsequent reports will have new or revised materials highlighted

Reason for Report: 1Q18 Earnings Results

Prev. Ed.: 4Q17 Earnings Results

Brokers’ Recommendations: Positive: 75% (9); Neutral: 25% (3 firms); Negative: 0.0% (0) Prev. Ed.: 8; 4; 0

Brokers’ Target Price: $67.20 (↓$2.30 from the last edition; 10 firms) Brokers’ Avg. Expected Return: 16%

*Note: Though dated May 15, share price and brokers’ material are as of May 9.

Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

Merck & Co., Inc. is a player in the global pharmaceutical industry with a strong position in the diabetes, cardiovascular and vaccines markets.

Of the 12 firms covering Merck, 75% (9 firms) are positive on the stock and 25% (3) are neutral. None of the firms have a negative opinion on the stock.

Positive or equivalent outlook (9/12 firms): The positive firms believe that Merck’s new product approvals as well as cost-cutting efforts and focus on drug development bode well for growth. The company also boasts a strong pipeline comprising cancer drugs, vaccines and biosimilars. Most of these firms believe that new products like Keytruda and Bridion should continue to contribute meaningfully to the top line. These firms are encouraged that Keytruda is gaining strong momentum from the new indication of first-line lung cancer and its potential approval in additional indications. Rising competitive pressure on the diabetes franchise and on products like Isentress (HIV), Zepatier (HCV) and Zostavax (vaccine) will remain headwinds in 2018.

Neutral or equivalent outlook (3/12 firms): These firms remain concerned about the generic competition for many key drugs and deteriorating performance of key growth franchises like Januvia and Isentress due to rising competitive pressure. A couple of firms believe that Merck has a limited pipeline beyond Keytruda and are concerned about the recent pipeline setbacks. Importantly, rising competition in the immuno-oncology market is also a significant concern. However, the firms are optimistic that new approvals for Keytruda should drive growth.

September 12, 2017

Overview

Based in Kenilworth, NJ, Merck & Co., Inc. is a global research-driven pharmaceutical products company. In 2009, Merck acquired Schering-Plough for $41.1 billion. Well-known products in Merck’s portfolio include Remicade (Immunology), Vytorin and Zetia (Cardiovascular), Januvia and Janumet (Diabetes), Isentress, Cubicin, Bridion and Zepatier (Hospital and Specialty), Temodar and Keytruda (Oncology), Cozaar/Hyzaar, Nasonex, Singulair, Fosamax, Zocor (Diversified Brands), ProQuad, Gardasil, RotaTeq, and Zostavax (Vaccines), and NuvaRing, Follistim AQ, Implanon, and Dulera (General Medicine and Women’s Health). In November 2009, Merck acquired Schering-Plough Corporation.

Merck sold off its Consumer Care business to Bayer for $14.2 billion in October 2014. In January 2015, Merck acquired Cubist Pharmaceuticals Inc. and added four marketed products, including Cubist’s potential blockbuster antibiotic drugs, Cubicin and Zerbaxa, to its hospital acute care portfolio. In October 2017, Merck acquired Rigontec to boost its immunotherapy pipeline for cancer. The company’s website is .

The firms have identified the following factors for evaluating the investment merits of Merck:

|Key Positive Arguments |Key Negative Arguments |

|Keytruda sales are gaining strong momentum with approval for additional |Merck is facing generic competition for several drugs including |

|indications, especially in the first-line lung cancer setting. The firms |Singulair, Temodar, Nasonex, Cubicin and Zetia. In 2017, Merck lost |

|believe that new products like Keytruda and Bridion should continue to |market exclusivity in the United States for Vytorin (in April) and ever |

|contribute meaningfully to the top line. |since, sales of the drug are declining sharply. |

|A strong cash position enhances financial flexibility. |Biosimilar competition for Remicade in the EU has intensified leading to |

| |pricing pressure. Sales are expected to decline rapidly in the coming |

| |quarters. |

|Merck has an attractive dividend yield. |Isentress and Zsotavax are also facing competitive pressure and Isentress|

| |is being impacted by sluggish growth of the integrase class. |

|The firms are positive on the company’s share repurchase program and the |Rising competition in the immuno-oncology market is also a significant |

|cost-cutting efforts and strategic initiatives undertaken by the company. |concern. |

Note: Merck’s fiscal year coincides with the calendar year.

Apr 15, 2018

Long-Term Growth

In October 2013, Merck launched a strategic initiative to streamline its business. The company generated net cost savings of more than $2.5 billion in 2015 primarily by reducing marketing and administrative and R&D expenses.

Merck is working on another global restructuring program, which is aimed at reducing the cost structure and increasing efficiency. It is lowering the number of manufacturing sites, including animal health sites, and consolidating other facilities. The company expects annual savings of about $4.0−$4.6 billion once the restructuring program is complete.

Merck, in order to build its long-term portfolio, is tapping external sources as well. The company entered into several licensing deals in the last couple of years with the expectation of more such deals in the future. Further, Merck is looking to drive long-term growth through biosimilars. The biosimilars market represents huge commercial opportunity. Merck has an agreement with Samsung Bioepis Co., Ltd. for the development and commercialization of several pre-specified and undisclosed biosimilar candidates.

Merck is expanding its presence in emerging markets. Like many of its peers, Merck is pursuing opportunities in China, India, Turkey, Russia, Poland, Brazil, and South Korea. It is looking to maximize the brands already approved in these markets and partnerships to gain additional customers, products and lifecycle management platforms.

February 13, 2018

Target Price/Valuation

|Rating Distribution |

|Positive |75%↑ |

|Neutral |25%↓ |

|Negative |0.0% |

|Avg. Target Price |$67.20↑ |

|High | $74.00↑ |

|Low |$56.00↑ |

|No. of Analysts with Target Price/Total |10/12 |

Recent Events

Merck Beats on Q1 Earnings, Lags Sales, Raises Outlook – May 1, 2018

Merck reported 1Q18 adjusted earnings of $1.05 per share, which beat the Zacks Consensus Estimate of 99 cents by 6.1%. Earnings rose 19.3% year over year attributable to slightly higher sales and lower R&D costs in the quarter.

Including a $1.4 billion charge related to the formation of a collaboration with Eisai, first-quarter 2018 earnings per share were 27 cents compared with earnings of 56 cents per share in the year-ago quarter.

Revenues for the quarter rose 6% year over year to $10.04 billion. Sales, however, slightly missed the Zacks Consensus Estimate of $10.12 billion. Currency movement positively impacted revenues by 3%. Excluding currency impact, sales rose 3% year over year.

2018 Guidance Raised

Merck raised its outlook for 2018 revenues to the range of $41.8 billion – $43.0 billion (previously $41.2 billion – $42.7 billion). The Zacks Consensus Estimate stands at $41.83 billion. The revenue guidance includes approximately 2% positive impact from currency fluctuation.

The company now expects adjusted earnings in the range of $4.16–$4.28, up from the previous guidance of $4.08–$4.23. The Zacks Consensus Estimate is pegged at $4.18 per share. The adjusted earnings guidance includes approximately 1% positive impact from currency fluctuation.

Adjusted operating expenses are still expected to increase year over year at a low- to mid-single digit rate.

Revenue

The company reported total revenues of $10.04 billion in 1Q18, up 6% y/y. The Zacks Digest average 1Q18 total revenues were in line with the company’s report.

Currency movement positively impacted revenues by 3%. Excluding currency impact, sales rose 3% year over year.

2018 Outlook: Merck raised 2018 sales guidance. Revenues are expected in the range $41.8 billion – $43.0 billion (previously $41.2 billion – $42.7 billion), including positive currency impact of approximately 2%.

|Revenue ($ in million) |1Q17A |

|Copy Editor |Debasmita Banerjee |

|Content Editor | |

|Lead Analyst | |

|QCA |Kinjel Shah |

|Last Updated By |Indrajit Bandyopadhyay |

|Reason for Update |1Q18 Earnings Update |

DISCLOSURE

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

DISCLOSURE

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

DISCLOSURE

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.[pic][pic][pic]

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Zacks Investment Research Page 18

May 15, 2018

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