Most of the headlines you'll see about Merck's (NYSE:MRK) first-quarter results focus on the company's better-than-expected earnings and lower-than-expected revenue.
It's true that Merck did report Q1 adjusted earnings per share (EPS) of $1.05, which was higher than the $1.00 adjusted EPS Wall Street expected. And it's true that the drugmaker's Q1 revenue of $10 billion was a little below the consensus analysts' estimate of $10.1 billion.
But those revenue and earnings figures aren't what investors really need to focus on. Why? They're just snapshots in time, and the comparisons are centered as much on Wall Street's ability to predict as they are on Merck's ability to perform. I think there are three other numbers in Merck's Q1 earnings results that should grab your attention.
1. Keytruda sales growth of 151%
Merck reported that sales for Keytruda soared 151% year over year in the first quarter to more than $1.46 billion. Keytruda first won Food and Drug Administration approval back in 2014. It's not a new drug anymore. So how did Keytruda generate such fantastic year-over-year sales growth? New indications and its monopoly as the only PD-1 inhibitor approved as a first-line treatment for non-small cell lung cancer (NSCLC).
These reasons behind Keytruda's tremendous performance in the first quarter are important to Merck's future. New indications in treating NSCLC and classical Hodgkin lymphoma helped drive sales much higher over the last year. The good news for Merck is that more indications could be on the way.
Merck hopes to win FDA approval for Keytruda in treating advanced cervical cancer by June 28, 2018. An FDA approval decision for a combination of Keytruda with chemotherapies -- Eli Lilly's Alimta and either cisplatin or carboplatin -- as a first-line NSCLC treatment is expected by Sept. 23, 2018. Another new approval as a second-line treatment for head and neck squamous cell carcinoma could come by the end of this year.
However, Keytruda probably won't be the only PD-1 inhibitor on the market in the first-line NSCLC indication for too much longer. In February, Bristol-Myers Squibb announced positive late-stage results for a combination of Opdivo and Yervoy as a first-line treatment for NSCLC. Roche could also be knocking at the door in the first-line NSCLC setting with its PD-L1 inhibitor, Tecentriq.
2. Total constant currency revenue growth of only 3%
Despite the enormous success for Keytruda, Merck's total revenue in the first quarter increased only 3% year over year on a constant currency basis. Foreign exchange rates helped double that level of revenue growth, but currency fluctuations can help in one quarter but hurt in the next.
Why wasn't Merck's Q1 revenue growth even higher considering the big boost provided by Keytruda? Several of the headwinds the company faced in the second quarter carried over into Q1. Pricing pressures continue to hold back momentum for diabetes drugs Januvia and Janumet. Sales for cardiovascular drugs Zetia and Vytorin are falling in the face of generic competition.
It's not just rival generic drugs that are causing problems for Merck, though. The company's shingles vaccine Zostavax is already losing significant market share to GlaxoSmithKline's Shingrix. Merck's hepatitis C drug Zepatier is practically a has-been with stronger new drugs from AbbVie and Gilead Sciences on the market.
Merck's brightest star aside from Keytruda is Gardasil. But the HPV vaccine generates sales that are less than half what Keytruda makes. The reality for Merck is that there's a heavy load on Keytruda's shoulders.
3. Research and development spending jump of 75%
One number in Merck's Q1 earnings update that might be easy to overlook is the big 75% jump in research and development (R&D) spending. But there's more to the story here.
Merck reported Q1 R&D spending of nearly $3.2 billion, up roughly $1.4 billion, or 75%, from the prior-year period. However, the reason for this increase is that Merck formed a collaboration with Eisai to jointly develop and market cancer drug Lenvima. Merck recorded a $1.4 billion charge in the first quarter related to this deal.
I still think this increased R&D spending is important to note, though, because it highlights what Merck is doing to find additional sources for growth. The company claims several promising late-stage candidates, notably including pneumococcal vaccine V114. However, Merck's move to partner on Lenvima could be only the first step in branching out beyond its pipeline to fuel growth.
Impacting other numbers
All three of these numbers made a difference in Merck's revised guidance for full-year 2018. The company now expects full-year revenue of $41.8 billion to $43 billion. Merck previously projected 2018 revenue would be between $41.2 billion and $42.7 billion. Full-year adjusted EPS is expected to be between $4.16 and $4.28, up from Merck's previous guidance of between $4.08 and $4.23.
However, Merck lowered its full-year 2018 GAAP EPS range. The company now projects full-year GAAP EPS between $2.45 and $2.57, compared to previous guidance of $2.97 to $3.12. This change reflects the big Q1 charge related to the collaboration with Eisai.
In my view, the three key numbers from Merck's first quarter -- Keytruda's sales growth, constant currency revenue growth, and the higher R&D spending -- summarize the story for the drugmaker right now. Its fortunes primarily ride on Keytruda. More growth should be on the way, but Merck can't count on 151% sales jumps every quarter. The company's relatively low real revenue growth highlights Merck's continuing challenges. And the R&D spending increase associated with the Eisai deal shows that Merck knows it needs to do more.