Despite Beating Q2 Expectations Merck Stock Slides

Jul 30

KEY TAKEAWAYS:
- Merck & Co. revised its full-year adjusted EPS projection to $7.94-$8.04, down from $8.53-$8.65.
- Second-quarter sales of its flagship drug, Keytruda, rose 16% year-over-year.
- The company beat Q2 expectations on both revenue and profit metrics.

Shares of Merck & Co. (MRK) plummeted on Tuesday after the pharmaceutical giant slashed its full-year adjusted profit guidance. Despite delivering solid second-quarter earnings and revenue, the outlook revision overshadowed the company’s performance, causing a significant dip in its stock price.

Earnings and Revenue Beat Expectations
In the second quarter, Merck reported earnings per share (EPS) of $2.14 on revenue of $16.11 billion, surpassing analysts' expectations of $2.05 EPS and $15.88 billion in revenue, as per Visible Alpha. The company’s pharmaceutical division contributed $14.41 billion to the revenue, marking a 7% increase from the previous year.

Merck’s flagship cancer drug, Keytruda, was a standout performer with sales surging 16% to $7.27 billion. Another notable contribution came from Winrevair, a pulmonary arterial hypertension drug approved by the FDA in March, which generated $70 million in sales.

Guidance Cut and Stock Reaction
Despite the strong quarterly performance, Merck lowered its full-year adjusted EPS guidance to a range of $7.94-$8.04, down from the prior range of $8.53-$8.65. This adjustment reflects the impact of a one-time charge of approximately $1.3 billion, or $0.51 per share, related to the acquisition of EyeBio.

The market reacted sharply to this news, with Merck's shares dropping over 9% to $115.91 by late morning on Tuesday. The stock experienced its most significant loss in three years, falling as much as 7.7%, largely due to concerns over the reduced profit outlook and issues with Gardasil shipments in China.

Challenges and Strategic Moves
Merck’s reduced profit forecast was partly influenced by lower-than-expected sales of its Gardasil HPV vaccine in China. Chief Executive Officer Rob Davis highlighted a “surprising” decrease in Gardasil shipments to China due to issues with a third-party distributor. This unexpected downturn in one of the world’s most populous markets raised concerns about the long-term sales targets for Gardasil.

Merck (MRK) has been proactive in seeking new growth avenues as its blockbuster drug Keytruda faces future pricing pressures. Last year, Merck spent nearly $11 billion to acquire Prometheus Biosciences Inc., a maker of treatments for autoimmune disorders. Additionally, Merck entered a deal with Daiichi Sankyo Co. worth up to $22 billion to collaborate on novel cancer medicines.

Updated Revenue Forecast and Future Prospects
Despite the lowered EPS guidance, Merck increased its full-year revenue forecast by $200 million at the median, to a range of $63.4 billion to $64.4 billion. The company’s next significant product, Winrevair, has shown promise, bringing in $70 million in its first full quarter on the U.S. market, exceeding analysts' expectations.

Adjusted earnings for Q2 were $2.28 per share, beating analysts’ average estimate by 11 cents. Revenue also outperformed expectations, bolstered by a 16% increase in Keytruda sales.

BMO analyst Evan Seigerman remarked on Merck’s consistent commercial performance, noting that the Winrevair launch exceeded even the highest expectations. He stated, “Another quarter of the same story. Merck commercial outperformance remains steady.”

Technical Outlook
As of the present time, the stock of Merck (MRK) has experienced a considerable decline of 9.45%. The Relative Strength Index (RSI) is currently at 30.09, indicating the stock is approaching the oversold region. Furthermore, a detailed inspection of the daily price chart reveals the presence of a long bearish Harami candlestick pattern, which is widely recognized as a significant reversal pattern in technical analysis.

Conclusion
Merck’s stock slide following the guidance cut underscores the market’s sensitivity to profit projections, even in the face of strong quarterly results. The company’s robust performance in Q2, driven by Keytruda and the successful launch of Winrevair, demonstrates Merck’s potential for growth despite current challenges. However, the reduced profit outlook and issues with Gardasil shipments in China highlight the hurdles Merck must navigate to maintain its market position and investor confidence.