Image source: Merck.

It's been roughly two weeks since global pharmaceutical giant Merck (NYSE:MRK) reported its third-quarter results and topped Wall Street's expectations, giving Wall Street and investors time to digest the reported results.

For the quarter, Merck announced global sales of $10.1 billion, a 5% decline from the prior-year quarter. Excluding negative currency effects from the stronger U.S. dollar, acquisitions, and divestments, Merck's worldwide sales actually grew by 4%. Adjusted EPS for the drugmaking giant came in at $0.96, a modest jump from the $0.90 recorded in Q3 2014. Comparatively, Merck's adjusted EPS came in $0.04 higher than expectations, and the company boosted its full-year guidance to a fresh range of $3.55 to $3.60 per share. 

Five things Merck's management wants you to know
Based on the headlines, it was a great quarter for Merck. But, as long-term investors, we understand that headline numbers and a few paragraphs in a quarterly report only give us a limited look at the health of a company's business model. If we want the complete picture on Merck, we need to be willing to analyze what its management team had to say during its third-quarter conference call.

With this in mind, here are the five most important points you'll want to know following Merck's Q3 results. Quotes are courtesy of S&P Capital IQ.

We're a lean, mean, cost-cutting machine

In addition, we are pleased to report that we have met and will exceed our annual target of $2.5 billion in net savings versus 2012 by the end of this year.
-- Robert Davis, CFO

The past couple of years have been tough on almost every major drug developer as patent expirations have hammered established drug portfolios, including Merck's. Merck's growth has suffered with loss of patent protection on blockbuster asthma attack prevention therapy Singulair, which came off patent in 2012.

Image source: Pictures of Money via Flickr.

In response to a challenging growth environment, Merck has been reining in its spending. In October 2013 Merck announced plans to cut 8,500 jobs (more than 10% of its global workforce), and $2.5 billion in overall spending. It said it would end late-stage research that didn't look promising and divulged that it planned to license out certain products. Based on commentary from its CFO, the company is on its way to achieving its cost-cutting goal by the end of the year.

Although cost-cutting isn't a long-term strategy to growth, it was the right solution at the time to the patent cliff problem. This proactive cost-cutting has buoyed Merck's EPS and helped stabilize its stock during a potentially volatile time.

What SGLT-2 effect?

If you look at JANUVIA, we continue to be pleased with the underlying demand in the U.S. where we're seeing about 4% TRx [total prescription] volume growth, and that's been consistent since before EMPA-REG and after EMPA-REG. And if you look at the most recent -- current week, it's just over 3% still. So we're seeing the underlying volume continue to be strong. If you look at what's occurring in the marketplace and you look at NBRx [new prescription] data, which is like real early data to try to understand the dynamics early in the marketplace, we see switching that's occurring within the SGLT2 class. What we do not see is switching occurring across classes at this point in time.
-- Adam Schechter, President of Global Human Health

There's little denying that Wall Street and investors have raked Merck's type 2 diabetes juggernaut Januvia over the coals in recent quarters. The introduction of next-generation type 2 diabetes therapies known as SGLT-2 inhibitors have some on Wall Street questioning whether Januvia could find its market share shrinking in the coming quarters or not.

Image source: Boehringer Ingelheim.

At the center of the debate is Eli Lilly's (NYSE:LLY) and Boehringer Ingelheim's Jardiance. This SGLT-2 inhibitor actually led to a statistically significant reduction in risk of death compared to the current standard of care in a long-term cardiovascular (CV) outcomes study in patients at high risk for a CV event. Considering that SGLT-2 inhibitors also have the welcome side effect of weight loss, it's not out of the question to assume that Jardiance and other SGLT-2 inhibitors could outperform DPP-4 inhibitors like Januvia.

Global Human Health President Adam Schechter squashed that talk -- for now, at least. In Q3, Januvia's growth was largely inventory/price driven, but new prescriptions still rose, which is a good sign for a mature product that Merck is clearly invested in. Unless we actually see patients switching from DPP-4s to SGLT-2s, it's probably not worth worrying about.

Keytruda's ramp-up has been impressive

Global sales for KEYTRUDA were approximately $160 million in the third quarter, an increase of 45% compared to the second quarter this year. In the U.S., KEYTRUDA retains approximately 70% of anti-PD-1 patient share in melanoma, and it's the #1 therapy to treat melanoma in the United States across all classes of treatment.
-- Adam Schechter

Image source: Merck.

News flash: Keytruda is kicking butt and taking names! It really shouldn't surprise anyone that cancer immunotherapies are selling like hotcakes, because they're the newest (and one of the more effective) lines of defense for select advanced-stage cancers. Immunotherapies also put personalized medicine in the spotlight, helping to justify the mammoth $143,000 annual wholesale cost tied to Keytruda.

What's truly notable about Schechter's commentary is that it implies that Keytruda appears to be leaving Bristol-Myers Squibb's (NYSE:BMY) competing anti-PDL1 therapy, Opdivo, in the dust, at least in advanced melanoma. On a wholesale cost basis, Keytruda is nearly 5% less expensive on an annual basis, so this distinction could be coming into play when it comes to consumer, physician, or insurer drug selection. It'll really be intriguing to see how market shares play out in non-small cell lung cancer for advanced high PD-L1-expressing patients in the coming quarters with Keytruda and Opdivo now both approved.

Turn those CETP-inhibiting frowns upside down

There will be an interim analysis [of anacetrapib in REVEAL] before the end of the year. In light of the results obtained with evacetrapib, it is anticipated that a futility component will be included in this analysis.
-- Roger Perlmutter, president

Merck's Roger Perlmutter spoke about close to a half-dozen exciting pipeline developments during the company's Q3 conference call, and while all were important in their own ways, I believe the commentary concerning anacetrapib, the company's once-daily CETP inhibitor, stood out.

Image source: Merck.

What makes the company's large phase 3 REVEAL study of anacetrapib -- a drug designed to lower LDL-cholesterol levels -- so intriguing is that Eli Lilly's evacetrapib, as well as two other CETP inhibitors studied over the past decade, have fallen flat on their faces and were eventually scrapped. Merck views the failure of Lilly's study as an even bigger opportunity for anacetrapib, but with a perfectly imperfect record for experimental CETP inhibitors, the market is clearly concerned.

The good news for investors is that late last week, the data monitoring committee suggested REVEAL continue to completion (which is expected in 2017). This is a good sign, as it means safety and futility don't appear to be issues for the time being.

Our M&A strategy, laid out

We've been very clear in the past that our preference is for bolt-on deals rather than the large consolidation-type mergers. But the fact of the matter is, we will continue to pursue pipeline assets on a selective basis, meaning they have to be really important scientific breakthroughs, and they also have to be capable of being acquired at a price that's valuable for our shareholders.
-- Ken Frazier, CEO

Lastly, Merck's CEO wants investors to understand that the company remains on the hunt for small to midsized business deals, but that the price has to be right, and the pipeline growth impressive enough for it to make a move.

As a reminder, Merck has already strengthened its acute hospital care portfolio with the addition of Cubist Pharmaceuticals, and it's beefed up its potential hepatitis C offerings with the acquisition of Idenix Pharmaceuticals. One need only look at Pfizer's buyout of Wyeth in 2009 to understand that big acquisitions don't always yield top-notch results, so I'd have to agree, here, that Merck's strategy to seek bolt-on acquisitions is probably a very smart one.

Merck: Worth your investment dollars?
Now for the million-dollar question: Since we have a better idea of what's really going on behind the scenes at Merck, is the stock worth adding to your portfolio?

The answer to that question remains unchanged from my own prior analysis in that it largely depends on your investing time horizon. The long-term investor who has intentions of buying Merck and holding it for at least five or 10 years is probably going to be in good shape. Merck's superior dividend yield (relative to the S&P 500's average yield), growth in oncology, and resurgence in Januvia should amount to slow but steady profit growth.

On the flip side, if you aren't planning to hold Merck for at least five years, then this is probably not the stock for you. Patent expirations of mature therapies and the chances of prescription drug reform taking shape could cause Merck's share price to be volatile in the near and intermediate terms.

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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