23Q2 sales increased 4.2% to $14.5 billion, but rose 11% excluding Lagevrio, a COVID-19 medicine. The sales gain ex-Lagevrio was due to sales increases of $1 billion in Keytruda and $800 million in Gardasil.
Merck reported a GAAP diluted loss of $2.35 per share vs. last year’s EPS of $1.55, and a non-GAAP diluted loss per share of $2.12 vs. last year’s earnings of $1.68. This year’s loss was due entirely to a $10.2 billion charge for the acquisition of Prometheus Biosciences. I had expected this charge to appear in 23Q3 results. Excluding this charge which amounted to $4.02 per share, Merck’s 23Q2 GAAP EPS was $1.66 and its non GAAP EPS was $1.96, better than my projections of $1.60 and $1.83. respectively.
Merck has updated its financial guidance. It now anticipates revenues of $58.6-$59.6 billion, up from $57.7-$58.9 billion, and non-GAAP EPS of $2.95-$3.05, down from $6.88-$7.00. The decline in non-GAAP guidance reflects the $4.02 acquisition charge, which under the last year’s SEC industry-wide enforcement action cannot be treated as a specified item in the calculation. It also includes an additional $0.14 for ancillary costs associated with the acquisition and $0.02 of additional FX headwinds. Excluding those total items of $4.18, the implied non-GAAP EPS guidance of $7.13-$7.23 is $0.23-$0.25 above previous guidance. However, Merck also withdrew its GAAP guidance, which introduces the possibility that other specified items, such as impairment charges, may affect its 23H2 performance. It has disclosed, for example, that it now expects 2023 restructuring costs of $550 million, up from $400 million previously.
Based upon 23Q2 results and guidance, I now project 2023 GAAP EPS of $2.11 and non-GAAP of $3.00. For 2024, my forecast shows GAAP EPS of $7.32 and non-GAAP EPS of $8.10. My 2024 EPS projections are higher than my previous forecast, but they are up only modestly from the implied 23H2 guidance.
After posting exceptionally strong performance in 2022, Merck’s stock has underperformed both the S&P 500 and its peer group (DRG) so far this year. Yet, its relative performance vs. the S&P 500 has improved in August, suggesting that the stock may be a good defensive choice if the market slips into a correction. Based upon my 2024 forecast, I am maintaining my neutral rating and price target of $109 for now. The price target equates to a one-year non-GAAP forward multiple of 13.5, slightly above the peer average of 13.0. Total return potential to the price target is about 3%.
This is a summary of my recent update report on Merck & Co., Inc. (MRK), originally published on August 15, 2023. To obtain a copy of the full report, please reach out to me using the contact information provided below.
August 17, 2023
Stephen P. Percoco
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