Merck & Co (MRK) 22Q3 Update

22Q3 sales rose 13.7% to $15.0 billion with double-digit gains in KEYTRUDA and GARDASIL/GARDASIL 9.  GAAP diluted EPS fell 29.0% to $1.28; but non-GAAP diluted EPS rose 5.6% to $1.85.  The company recorded an $887 million ($0.27 per share) asset impairment charge related to ArQule, Inc., which was acquired in 2020.  It also recorded $690 million in upfront and option payments on three collaborations.  Merck’s revenues were 8.4% above my estimate of $13.8 billion. Its GAAP EPS was $0.07 below my estimate of $1.34; but non-GAAP EPS exceeded my $1.64 estimate by $0.21.

Based upon the 22Q3 results and its outlook, Merck raised its full year sales guidance from $57.5-$58.5 billion to $58.5-$59.0 billion, lowered its GAAP EPS guidance to $5.68-$5.73 from $5.89-$5.99 and raised its non-GAAP EPS guidance from $7.25-$7.35 to $7.32-$7.37.

Merck reported further advancements in its pipeline.  Among this quarter’s achievements were positive results from a Phase 3 trial for sotatercept, new indications for KEYTRUDA as monotherapy and in combinations, approval in the EU for VAXNEUVANCE for children aged 6 months to 18 years; and an expanded treatment cohort for GARDASIL 9 in China to women aged 9 to 45 (from 16 to 26 previously).  It also announced new collaborations with Moderna for a personalized cancer vaccine; Orna Therapeutics for vaccines and therapeutics for infectious diseases and cancer using Orna’s circular RNA technology; and Orion Corporation for a potential treatment for metastatic castration-resistant prostate cancer. After a mid-summer pause, Merck’s stock has outperformed both the broader market and its peer group.  Despite the advance, the stock still trades at a discount to the broader market on non-GAAP EPS, but is now valued in line with peers, excluding LLY.  Its recent superior relative performance reflects its better-than-anticipated financial results, which seem set to continue through 2023.  Based upon 22Q3 results, I have raised my outlook for Merck’s revenues and earnings for 2023.  Accordingly, I am raising my rating on the stock to “2” (Outperform) with a price target of $109 (up from $95). At the PT, the total return potential on the stock, with its 2.8% dividend yield, is about 13%.

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 9, 2022

Stephen P. Percoco
Lark Research
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© 2022 by Stephen P. Percoco, Lark Research.   All rights reserved.

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