Can Merck (MRK) Deliver a Positive Surprise in Q4 Earnings?

We expect Merck & Co., Inc. MRK to beat expectations when it reports fourth-quarter and full-year 2017 results on Feb 2, before market opens. Last quarter, the company delivered a positive earnings surprise of 7.77%.

Merck’s performance has been pretty impressive, with the company exceeding earnings expectations in all the trailing four quarters. The average positive earnings surprise over the last four quarters is 7.76%

Merck’s shares have declined 0.6% in the past year against a 27.5% increase for the industry.

Factors to Consider

Merck’s new products like Keytruda (cancer) and Bridion (sugammadex) Injection are likely to drive the top line this quarter. However, loss of market exclusivity for several drugs and lower sales of key products like Januvia and Gardasil/Gardasil 9 may hurt sales.

Keytruda sales are being driven by the launch of new indications globally. Keytruda sales are gaining particularly from strong momentum in the first-line lung cancer indication as the therapy is the only anti-PD-1 approved in first-line setting.

The Keytruda development program also significantly advanced in 2017 with regulatory approvals for six new indications in the United States, four in Europe and three in Japan.

The approvals expanded the patient population, driving up sales in the third quarter. This momentum is likely to drive fourth-quarter as well as 2018 results.

Strong demand in most markets is driving sales of Bridion (sugammadex) Injection.

Meanwhile, rising competitive pressure is hurting sales of relatively newer drugs like Zostavax and Zepatier. On the third-quarter earnings call, Merck management had warned that Zepatier uptake in the fourth quarter and in 2018 may be impacted by evolving marketplace and competitive landscape.

While continued pricing pressure is hurting sales of older products like Januvia, lower demand due to competitive pressure is dampening sales of Isentress. Importantly, on the Q3 call, the company had said that though pricing pressure will continue to hurt sales of Januvia/Janumet, volumes may improve in the future quarters, especially outside the United States.

The animal health franchise should also boost sales this quarter. On the Q4 call, investors will be keen to find out if the vaccine segment has recovered from product shutdown issues related to the last year’s cyber-attack.

Finally, higher investments for ongoing launches, remediation expenses related to the cyber attack, as well as additional R&D costs associated with the new oncology collaboration with AstraZeneca AZN will raise costs and hurt profits.

Earnings Whispers

Our proven model shows that Merck is likely to beat estimates this quarter because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for a likely positive surprise.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate (95 cents per share) and the Zacks Consensus Estimate (94 cents per share), is +1.06%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Merck has a Zacks Rank #3. The combination of Merck’s Zacks Rank #3 and positive ESP makes us confident of an earnings beat in the upcoming release.

Sell-rated stocks (Zacks Rank #4 or 5), on the other hand, should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some other drug/biotech stocks that have the right combination of elements to beat on earnings this time around:

Alexion Pharmaceuticals, Inc. ALXN with an Earnings ESP of +3.45% and a Zacks Rank #3. The company is scheduled to release results on Feb 8. You can see the complete list of today’s Zacks #1 Rank stocks here.

Novo Nordisk A/S NVO has an Earnings ESP of +2.66% and a Zacks Rank #2. The company is scheduled to release results on Feb 1.

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