Merck posts higher third-quarter sales as Keytruda growth offsets drop from Gardasil

Merck & Co reported stronger-than-expected third-quarter revenue of $17.28 billion and adjusted EPS of $2.58, primarily driven by a 10% increase in Keytruda sales, which offset declining Gardasil sales in China. Despite the beat, shares fell 3% premarket after the company narrowed its full-year revenue guidance, though it did raise its EPS outlook. Analysts noted the "modest" beat, and concerns remain regarding the performance of new growth drivers like Winrevair, which significantly missed expectations, as Merck navigates diversification beyond Keytruda ahead of biosimilar competition.

Analysis

Merck & Co (MRK) reported a Q3 revenue of $17.28 billion and adjusted EPS of $2.58, both exceeding analyst estimates of $16.96 billion and $2.35 respectively. This beat was primarily driven by a 10% increase in Keytruda sales to $8.1 billion, which offset a decline in Gardasil sales to $1.75 billion, attributed to inventory work-through and consumer spending pressure in China. Despite the beat, MRK shares fell 3% premarket, reflecting investor caution.

The company narrowed its full-year revenue guidance to $64.5 billion-$65.0 billion from a prior range of $64.3 billion-$65.3 billion, which J.P. Morgan analysts characterized as "largely re-iterated" and the quarterly beat as "modest." However, Merck did raise its full-year EPS forecast to $8.93-$8.98 from $8.87-$8.97, indicating improved profitability expectations despite the revenue adjustment.

A key concern emerged from the performance of Winrevair, acquired via the $10 billion Verona Pharma takeover, with sales of $360 million materially below expectations, according to Bernstein. This underperformance is critical as Merck aims to diversify its pipeline ahead of Keytruda's biosimilar competition later this decade and navigate broader industry headwinds like potential U.S. drug pricing reforms.

Key Decisions for Investors

• Investors should closely monitor the sales trajectory of Winrevair and other pipeline assets, as their performance is crucial for Merck's diversification strategy ahead of Keytruda's biosimilar competition.
• Given the mixed Q3 results—a beat on headline numbers but a premarket share decline and analyst concerns over new growth drivers—a cautious approach may be warranted, focusing on the company's ability to execute on its long-term growth initiatives.
• Evaluate Merck's valuation in light of the narrowed full-year revenue guidance and the ongoing industry headwinds, including potential U.S. drug pricing reforms, which could impact future profitability.