Merck & Co., Inc. Shows Us How to Post Losses and Still Beat the Market

Here’s how to post a 28.6% profit loss, miss estimates, and still beat the S&P 500.

Feb 11, 2014 at 9:30AM

When Merck (NYSE:MRK) posted an annual net income loss of 28.6% before the bell on February 5, I hardly expected shares to jump 2% at the open. Top and bottom lines slightly below consensus estimates should have dampened the mood even further. Despite the uninspiring figures, on a day where the broader market fell, America's second largest drugmaker finished the day slightly positive. In fact, over the past month, the S&P 500 has fallen over 4%, while Merck has risen over 7.5%.

MRK Chart

MRK data by YCharts

Clearly it wasn't Merck's financial performance during 2013 that pleased the Street. Lately, optimism surrounding the company's next-generation cancer therapies have buoyed the drug major's stock price, while post-exclusivity sales of former No. 1 product Singulair have plummeted. The company has a lot riding on an immunotherapy candidate facing competition from Bristol-Myers Squibb (NYSE:BMY), Roche (NASDAQOTH:RHHBY), and latecomer AstraZeneca. Let's take a look at the competing programs, to see if the excitement is justified.

How they work
Merck, Bristol-Myers, AstraZeneca, and Roche all have promising candidates in the pipeline that act on the same pathway. A basic understanding of their function should help us better evaluate their potential going forward.

One of the most puzzling aspects of oncology has been the way tumors elude the immune system. One method of avoiding attack is by taking advantage of the PD-1 inhibitory protein found on the surface of activated T-cells. Many types of cancerous tumors present a specific antigen on their surface that interacts with the inhibitory protein and prevents the immune system from attacking.

You could think of the activated T-cell as an angry robot with PD-1 as an off-button. Antigens on the surface of tumor cells works like a broomstick that pushes the off-button before it can attack. Covering the button, or otherwise thwarting the broomstick, would allow the immune system to do its job and destroy the cancerous cells.

PD-1 competitors
Merck's MK-3475, and Bristol-Myers' nivolumab are both monoclonal antibodies that throw up a blockade over the PD-1 protein. The main difference between the two is that nivolumab is fully human, while MK-3475 is humanized. Although Merck's therapy is designed to avoid immunogenicity, or the triggering of the body's immune system against the antibody, it could be something to keep an eye open for given that Merck's antibody is not human.

Unlike MK-3475 and nivolumab, Roche's anti-PDL1 immunotherapy, MPDL3280A covers the broomstick, stopping it from switching off activated T-cells. During its recent earnings call, AstraZeneca discussed plans for advancing an anti-PD1 and anti-PDL1 candidate that are both in phase 1 clinical trials.

Race standings
Foolish author Stephen Simpson and I share the opinion that the market places too much emphasis on which therapy hits the market first. Still, I feel that the attention given in-house to quickly advancing a candidate through the development process speaks volumes about a company's confidence in its potential.

If you must have a leader, Merck seems most likely to market its PD-1 immunotherapy first. MK-3475 received a Breakthrough Therapy designation from the FDA last year for the treatment of advanced melanoma. This means the agency should allow the company to file a Biologics License Application (BLA) for MK-3475 before seeing its long-term survival data. Last month, the company announced that it had already started a rolling BLA, and expects to complete it in the first half of the year.

Further illustrating Merck's confidence in MK-3475 is the recent announcement of upcoming combination trials in collaboration with Amgen, Incyte, and Pfizer. The company has also signed a recent discovery pact with Ablynx. The Belgian biotech has a proprietary discovery platform that uses smaller, more stable, humanized versions of antibodies that exist in camels and llamas. These nanobodies are capable of acting on multiple targets unavailable to their larger cousins, with a lower toxicity profile.

Although Merck's PD-1 therapy might hit the market first for advanced melanoma, you shouldn't let that fact discount the effort Bristol-Myers has put into nivolumab, and the rest of its immuno-oncology program. Its candidate has four approved phase 3 trials.

Overall, Bristol-Myers and Merck are leading the PD-1 charge together. Roche's PD-L1 therapy is well behind, with a single phase 3 lung cancer trial that has not started recruiting. AstraZeneca's PD-1 candidate is in a single Phase 1 trial. Its PD-L1 antibody is in several phase 1 trials, and a phase 1-2 trial in combination with GlaxoSmithKline's recently approved BRAF mutation specific melanoma combo.

Foolish final take
One of the hallmarks of high-points in market cycles is a disregard for earnings in the anticipation of future prospects. I would never try to predict the end of the bull run -- after the past couple weeks, plenty are -- we've been enjoying, but it is worth pointing out Merck's currently high valuation, despite sinking profits.

MRK Chart

MRK data by YCharts

Given the potential for MK-3475, expecting significantly increased earnings going forward is reasonable. However, it's important to remember that when a company's price is based this heavily on optimism for its future, moderate changes in sentiment are amplified in price fluctuations. Before diving into this stock, you should at least be prepared to experience flat to negative returns until this oncology program has a chance to prove itself with recorded sales.

Value investing tips from the legend himself
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Cory Renauer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers