New Jersey-based drugmaker and Dow-30 component Merck (MRK Free Merck Stock Report) reported first-quarter GAAP earnings of $1.12 a share, versus $0.27 in the comparable period of 2018. The sharp year-over-year improvement was driven primarily by reduced R&D costs (-40%), as last year's figure was inflated by a $1.4 billion charge related to a collaboration with Eisai Co., Ltd. That said, a nice uptick in revenues and lower taxes also provided support to the bottom-line comparison. Meantime, adjusted earnings, which exclude one-time gains, losses, and other nonrecurring items, and are more closely followed by Wall Street, came in at $1.22 a share, versus $1.05 in Q1, 2018. The adjusted figure soared past consensus expectations of $1.06, highlighted by a strong beat in the Gardasil vaccine franchise, and management responded by raising its full-year guidance (more below). Shares of MRK were trading 2% higher on the release.

In the March period, worldwide revenues advanced 8% year over year, to $10.8 billion, marking the company's sixth-consecutive quarter of top-line growth. Performance continued to be fueled by strong momentum in standout immunotherapy drug Keytruda, where sales surged 55% year over year, to $2.27 billion. While the tally fell a hair below Wall Street's lofty $2.33 billion target, it still topped the $1.8 billion brought in by key rival Opdivo, made by Bristol-Myers Squibb (BMY). In terms of total sales, Keytruda has emerged as a clear favorite in the high-growth immuno-oncology space and has also established a dominant position in the most lucrative segment in the market, lung cancer. Current projections suggest that annual sales could top $12 billion by 2024.

Although Keytruda remains the top headliner, Merck is also seeing nice gains in other areas of its business. As mentioned above, Gardasil provided much of the upside versus consensus targets in Q1 (+27% year over year, to $838 million), aided by the ongoing commercial launch in China and improved uptake trends in Europe. The drugmaker also posted 20%-plus gains in newer assets including Proquad (+27%) and Bridion (+25%), which helped partially offset softness in the blockbuster Januvia/Janumet diabetes franchise (-5%), a 4% pullback in the Animal Health business, and lingering generic pressure on cholesterol-lowering drugs Zetia/Vytorin (-50%).

For full-year 2019, management upped its adjusted earnings guidance to $4.67-$4.79 a share (previously $4.57-$4.72) and its revenue forecast to $43.9 billion-$45.1 billion (previously $43.2 billion-$44.7 billion). The revised ranges imply year-over-year growth of 9% and 5%, respectively, at the midpoints, and were a welcome sign after the company's previous guidance was seen as a bit light. In our view, the bulk of the improvement is likely to come from continued development of Keytruda. While further gains in the lung cancer market will be a key catalyst (65% of U.S. sales), the drug has also piled up approvals to treat several other types of cancers which should provide additional avenues for growth going forward.

All told, we continue to view Merck as a strong option for investors seeking participation in the large pharma space. The stock scores well across all of our proprietary risk metrics, and an above-average dividend yield (2.7%) also provides some downside protection.

About The Company:Merck & 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.