New Jersey-based drugmaker and Dow-30 component Merck (MRKFree Merck and Company Stock Report) has reported fourth-quarter earnings of $0.69 a share, versus a loss of $0.39 in the comparable year-ago period. Much of the improvement can be chalked up to the absence of tax reform related charges ($2.6 billion in Q4, 2017), but mid-single-digit growth on the top line and reductions in production (-4%), R&D (-4%), and restructuring costs (-55%) provided further support to comparisons. Meantime, adjusted earnings, which exclude one-time gains, losses, and other nonrecurring items, and are more closely followed by Wall Street, came in at $1.04 a share, versus $0.98 in 2017. The adjusted tally squeaked past consensus expectations of $1.03, thanks in part to continued strong demand in standout immuno-oncology drug KEYTRUDA. Shares of MRK were trading a few percentage points higher on the release.

In the December period, worldwide revenues advanced 5% year over year, to $11.0 billion, marking the company's fifth-consecutive quarter of top-line growth. Performance continued to be driven primarily by strength in the KEYTRUDA franchise, where sales surged 66%, to $2.2 billion. The sharp increase reflected strong momentum in the non-small cell lung cancer segment (NSCLC), and additional launches with new indications globally. Merck also received nice support from lead vaccine asset GARDASIL (+32%), which benefited from the ongoing commercial launch in China and improved uptake in domestic and European markets. Growth in animal health was another key catalyst (+6%), helping to offset weakness in the JANUVIA/JANUMET diabetes franchise (-4%) and lingering generic pressure on cholesterol-lowering drugs ZETIA/VYTORIN (-52%).

For full-year 2019, management expects adjusted earnings of $4.57-$4.72 a share on revenues of $43.2 billion-$44.7 billion, implying annual growth of 7% and 4%, respectively, at the midpoints. While the guidance came in at the lower end of analyst expectations, looking for $4.68 a share and $44.5 billion on average, it did not seem to impact investor sentiment. We are currently targeting 2019 adjusted earnings of $4.70 on revenues of $44.5 billion.

In our view, little has changed in regard to Merck's long-term growth story. While several core drugs are gaining traction and the animal health business remains a key component (10% of '18 sales), performance going forward remains heavily tied to the continued success and development of KEYTRUDA. The drug has emerged as the favorite in the attractive immuno-oncology space, recently surpassing its main rival OPDIVO (made by Bristol-Myers Squibb) in terms of total sales, and has established a dominant position in the most lucrative segment of the market, lung cancer. Current projections suggest that annual sales of KEYTRUDA could top $12 billion by 2024.

All told, we continue to view Merck has a strong option for investors seeking participation in the large pharma space. We like the stock for year-ahead relative price performance and it scores well across all of our proprietary risk metrics. An above-average dividend yield and expectations for continued stock repurchases should enhance shareholder value.

About The CompanyMerck & Co. is an international developer, manufacturer, and distributor of pharmaceuticals. Important product names include JANUVIA/JANUMET (type-2 diabetes); ZETIA/VYTORIN (hypercholesterolemia); GARDASIL (vaccine); KEYTRUDA (lung cancer); and REMICADE (arthritis). In 2014, the company made three significant acquisitions: Schering-Plough, Idenix Pharmaceuticals, and Cubist Pharmaceuticals.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.