New Jersey-based drugmaker and Dow-30 component Merck & Co. (MRK - Free Merck Stock Report) reported fourth-quarter GAAP earnings of $0.92 a share, versus $0.69 in the comparable period of 2018. The sharp year-over-year improvement was fueled primarily by higher revenues (more below) and a lower share count, partially offset by increases in production (+12%), SG&A (+9%), and R&D (+15%) expenses. Meantime, adjusted earnings, which exclude one-time gains, losses, and other nonrecurring items, and are more closely followed by Wall Street, came in at $1.16 a share, versus $1.04 in Q4, 2018. While the adjusted tally squeaked past consensus expectations calling for $1.15 on average, revenues were a bit light, due in part to a miss in Merck's standout immuno-oncology drug KEYTRUDA. Shares of MRK slipped about 4 percentage points on the release.
In the December period, worldwide revenues advanced 8% year over year, to $11.87 billion, marking the ninth-consecutive quarter of top-line growth. Performance continued to be driven by strong momentum in the KEYTRUDA franchise (sales +45%, to $3.11 billion), which benefited from further gains in the non small-cell lung cancer market and improved uptake trends across other indications. That said, results did come in a bit below consensus expectations calling for about $3.24 billion and this was the main reason for the aforementioned top-line miss. Strong gains in several of Merck's complementary assets, including BRIDION (+22%) and ROTATEQ (+21%), and an 8% uptick in animal health sales provided further support to top-line comparisons, helping to mitigate lingering softness in diabetes drugs JANUVIA/JANUMET (-3%) and a sharp pullback in Merck's best-selling vaccine GARDASIL (-17%). The latter had been a key growth driver over the course of 2019, but was hit hard in Q4 due to borrowing-related activity from the CDC.
The big story surrounding the Q4 press release was that Merck is planning to spin off its women's health business, biosimilar drugs, and legacy products into a new publicly traded company. Management indicated that the move would enable MRK to sharpen its focus on key growth drivers, like KEYTRUDA and vaccines. In our view, the strategy seems to mirror that of rival Pfizer, who has also been trimming certain aspects of its business to concentrate more on innovative pharmaceuticals. Merck expects to complete the transaction during the first half of 2021 and said that the new company would send it $8 billion-$9 billion through a special tax-free dividend. The company also forecasts cost savings of over $1.5 billion by 2024.
All told, we continue to view Merck as an attractive option for investors seeking participation in the large pharma space. The equity also boasts an above-average dividend yield and scores well across all of our proprietary risk metrics.
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.