Next week is shaping up to be an important week for earnings, with a huge percentage of the S&P 500 companies reporting their results. One such company that's bound to garner a lot of attention, which also happens to be a component of the Dow Jones Industrial Average, is Big Pharma Merck (NYSE:MRK).
Merck is slated to report its third-quarter earnings results on Tuesday, Oct. 27, 2015. For the upcoming quarter Wall Street is forecasting $10.1 billion in revenue, a dip from the $10.6 billion reported in the year-ago period, and EPS of $0.92, up modestly from the $0.90 it reported in Q3 2014. Whereas Merck's top line has been mostly hit-or-miss when it comes to Wall Street's forecasts, it's surpassed the Street's EPS estimates in 10 of the past 11 quarters. This doesn't necessarily mean Merck is in line to beat on its EPS numbers, but the trend has certainly been that way for nearly three years.
But, truth be told, headline numbers can only tell you so much about a company. They do nothing to define how a company achieved its sales and profit numbers. For that, we need to dig below the surface into the meat and potatoes of a company's quarterly earnings results. When Merck does release its results in a matter of days, I'd suggest paying close attention to how it addresses the following questions.
How well did Januvia's sales hold up in Q3?
The most immediate near-term concern for Merck and its shareholders is how well DPP-4 inhibiting type 2 diabetes drug Januvia held up during the third quarter.
Januvia is a blockbuster therapy for Merck, and it's responsible for about $6 billion in sales annually. However, a new class of type 2 diabetes drugs could wind up placing a lot of pressure on Januvia going forward. This class is comprised of a handful of SGLT-2 inhibitors. SGLT-2 inhibitors work in the kidneys, as opposed to liver and pancreas, and block the absorption of glucose, allowing the patient to excrete excess blood sugar through their urine.
Eli Lilly (NYSE:LLY) and Boehringer Ingelheim's co-developed SGLT-2 inhibitor, Jardiance, really turned heads in August when the partners reported that a long-term cardiovascular outcomes trial (EMPA-REG OUTCOME) showed that it was superior to the current standard of care in terms of lowering the risk of a cardiovascular event in high-risk CV patients. It may be a bit early to see an effect on Januvia's total sales given that Eli Lilly and Boehringer Ingelheim didn't release the magnitude of the outperformance until Sept. 21, but it'll be important to monitor how Merck plans to mitigate what could be weak Januvia sales moving forward.
Did Keytruda's momentum continue this past quarter?
Instrumental to Merck's long-term growth prospects is its relatively new cancer immunotherapy drug Keytruda. First approved as a treatment for BRAF V600 mutation-positive metastatic melanoma, Keytruda witnessed its label expanded by the Food and Drug Administration in early October to advanced nonsmall cell lung cancer. Unfortunately, this approval won't have an impact on Merck's Q3 results, but rival therapy, Opdivo, did expand to NSCLC many months before Keytruda.
In the second quarter, Keytruda closed the sales gap between it and Opdivo in a big way, but it's possible Opdivo may have outsold Keytruda by a substantive amount thanks to its added NSCLC indication in Q3. I'd suggest investors really hone in on Keytruda's growth in metastatic melanoma and listen closely to early estimates regarding its NSCLC prescriptions, which should be available when Merck reports. This is potentially a $5 billion per-year drug at its peak, so a lot of attention should be given to this budding immunotherapy giant.
Did we get an update on Merck's bolt-on acquisition strategy?
Like many Big Pharma companies, Merck has been pounded in recent years by patent expirations. In order to overcome the lost revenue that comes with the introduction of generic competitors, as well as increasing competition in other indications, Merck has turned to acquisitions to bolster its pipeline and product portfolio.
Whereas some companies are going for the gusto when they make an acquisition, Merck's strategy has been (to steal a sports term) to "dink-and-dunk" its way to success. Instead of looking at large-cap drugmakers, Merck believes in bolting on smaller but complementary drug developers in areas where it's looking to secure its leadership. Areas of interest for future acquisitions could include infectious diseases, oncology, and cardiovascular, although I wouldn't count on any acquisitions being limited to just these therapeutic indications. Shareholders should consider closely examining any commentary from Merck's management pertaining to its acquisition strategy.
Will Merck boost its dividend once more?
One of the greatest allures of Big Pharma is the incredible cash flow that each company can deliver. Because pharmaceutical companies like Merck have such incredible pricing power and extensive patent periods, their cash flow can be used to support dividend payments that are typically above the average yield of the S&P 500 (2%).
Merck is no different. Merck's current yield of 3.5% is well above the market average, and it tends to attract long-term-minded investors to the stock, which also keeps volatility at a minimum. Following four consecutive quarters with a dividend payment of $0.45, shareholders are probably going to be eager to see Merck boost its dividend once more. Although Merck's top line is still struggling, inclusive of negative currency translation, its substantial cash flow should allow it to hike its dividend. Pay close attention to any comments made in Merck's press release concerning its intentions to boost shareholder payouts.
What now for Merck shareholders?
Now that you have a better idea of what to be on the lookout for when Merck delivers its Q3 results, you might be wondering what you should do in lieu of the report. The not-so-surprising answer is: absolutely nothing.
Quarterly earnings results are certainly important to help investors understand what type of outlook to expect from a company, but rarely does a single earnings report alter your investing thesis in a company. Thus, if you're currently a Merck shareholder I foresee no reason to jump out of your position before the report, and I don't see any particular reason why those on the sidelines should be diving into Merck, either. Merck definitely has some growth challenges to face, and its Q3 results will likely help address some of its issues.
Mark your calendars folks, because Oct. 27 is the big day!
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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