23Q3 sales increased 3.0% to $16.0 billion. Excluding currency and sales of Lagevrio, sales rose 8%. The sales gain came from an increase of $0.9 billion in Keytruda and $290 million in Gardasil.
GAAP diluted EPS was $1.86 per share vs. last year’s $1.68, and non-GAAP diluted EPS was $2.13 vs. last year’s $1.86. 23Q3’s earnings gain was due entirely to the increase in sales. Although there were gives and takes -i.e. a 60 bp decline in gross margin and a negative swing in other income was entirely offset by lower operating and R&D cost ratios – income before taxes as a percent of sales was flat at 35.2%. The tax rate declined by 150 bp, so net income as a percent of sales rose 60 bp to 29.8%. 23Q3 revenues exceeded my estimate of $14.7 billion, while non-GAAP EPS also topped my estimate of $1.86.
In October, Merck entered into a collaboration with Daiichi Sankyo of Japan for the development of three antibody drug conjugates (ADCs) as potential treatments for a wide range of tumor types. In conjunction with this collaboration, Merck will take a $5.5 billion 23Q4 charge.
That charge figures prominently in the change in the company’s fourth quarter and full year 2023 guidance. Thus, the company reduced its Non-GAAP EPS guidance from a midpoint of $3.00 ($2.95-$3.05) to $1.36 ($1.33-$1.38). $1.70 of the reduction is due to the after-tax per share impact of the Daiichi charge (with an additional $0.04 for other costs associated with the transaction). Excluding the combined $1.74 charge, the mid-point of the non-GAAP guidance range would be $3.10 ($3.07-$3.12), which is $0.10 above management’s previous guidance. The adjusted increase is due mostly to higher anticipated revenues.
Based upon 23Q3 results and guidance, I now project 2023 GAAP EPS of $0.27 and non-GAAP of $1.37. For 2024, my GAAP forecast is $7.46 and non-GAAP $8.25, both up $0.14 from my previous projections.
Merck’s stock has underperformed both the S&P 500 and peers (DRG) YTD. The stock is showing signs of bottoming, but is still technically in a downtrend. If it fails to find support here, it could fall to the low $90s. Still, based upon my 2024 forecast and the drop in the stock, I am raising my price target from $109 to $111 and rating from “3” neutral to “2” outperform. The total return potential to the price target is 12%. The price target equates to a one-year non-GAAP forward multiple of 13.5, above the peer average of 12.6.
This is a summary of my recent update report on Merck & Co., Inc. (MRK). To obtain a copy of the full report, please reach out to me using the contact information provided below.
November 27, 2023 (Report originally published on November 25, 2023.)
Stephen P. Percoco
Lark Research
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