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
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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