24Q1 sales increased 8.9% to $15.8 billion. Excluding currency, sales rose 12%. The sales gain came from an increase of $1.15 billion in Keytruda and $277 million in Gardasil. GAAP diluted EPS was $1.87 per share vs. last year’s $1.11, and non-GAAP diluted EPS was $2.07 vs. last year’s $1.40. GAAP gross margin improved by 470 bp to 77.6%, largely due to the expiration of certain royalty payments on Keytruda and Gardasil. SG&A expense was flat in dollars but declined by 130 bp as a percent of sales to 15.7%. R&D costs declined by $300 million to $4.0 billion and by 420 bp as a percent of sales to 25.3%. All of the decline in R&D was due to lower charges for business development transactions, partially offset by higher compensation costs and increased clinical development spending and investments.
Based upon the results, management raised and narrowed its 2024 guidance. It now anticipates revenues of $63.1 billion to $64.3 billion, up $400 million at the low end of the range and up $250 million at the midpoint. It also expects non-GAAP EPS of $8.53-$8.65 (up from $8.44-$8.59 previously).
In May, Merck agreed to acquire EyeBio, a privately held, clinical-stage, ophthalmologically focused biotechnology company, whose lead candidate, Restoret, is a potential first-in-class treatment for retinal diseases, including diabetic macular edema. The acquisition price is $1.3 billion. It is expected to close during 24Q3. Merck will probably write off the acquisition cost immediately after closing. If so, its non-GAAP EPS guidance will be lowered when it reports 23Q2 results in July.
Based upon 24Q1 results, the updated guidance, other company disclosures and EyeBio, I now project 2024 GAAP revenues of $63.8 billion, GAAP EPS of $7.25 and non-GAAP EPS of $8.14. For 2025, my projections anticipate revenues of $64.8 billion, up 1.6%, GAAP EPS of $8.09 and non-GAAP EPS of $9.00.
YTD, Merck’s stock has outperformed the S&P 500 and peers; but it has underperformed since April, trading sideways. Based upon my 2025 forecast, I am raising my price target to $140, which equates to a forward multiple of 15.6 (in line with the current one-year forward multiple) times projected non-GAAP EPS of $9.00. From the current quote, the total return potential is 7.4%, including the stock’s current dividend yield of 2.3%. Accordingly, I am reducing my rating on the stock from “2” (outperform) to “3” (neutral). I am continuing to use non-GAAP EPS for valuation purposes for now, despite its drawbacks as discussed in my full report.
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.
June 30, 2024 (Report published on June 26, 2024.)
Stephen P. Percoco
Lark Research
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