23Q1 sales fell 9.8% to $14.5 billion, but rose 13.5% excluding Lagevrio, a COVID-19 medicine whose sales have fallen sharply as the pandemic has receded. The sales gain ex-Lagevrio was due entirely to a $1 billion increase in Keytruda sales and a $500 million increase in Gardasil sales.
GAAP diluted EPS fell 34.9% to $1.11 and non-GAAP diluted EPS fell 34.7% to $1.40. The decline was driven by the decline in sales and a 66% increase in R&D expense, which more than offset improvements in gross margin and other expenses. The increase in R&D expense was due mostly a $1.2 billion charge for the acquisition of Imago Biosciences; but R&D spending excluding the Imago charge was still up 23% as Merck presses forward with its pipeline. Non-GAAP EPS fell short of my $1.63 estimate. I had modeled in an earnings decline, but obviously not enough. Non-GAAP EPS exceeded the consensus estimate of $1.34.
In its financial outlook, management raised the midpoint of its 2023 sales guidance by 0.6% to $58.3 million; lowered the midpoint of its GAAP EPS guidance by 0.4% to $5.91 and raised the midpoint of its non-GAAP EPS guidance range by 1% to $6.94.
On April 16, Merck agreed to acquire Prometheus Biosciences (RXDX) for $10.8 billion. Closing is expected in 23Q3. Merck anticipates an R&D charge of $10.3 billion associated with the acquisition. I incorporate this charge, which was not included in the company’s updated 2023 financial outlook, in my projections.
Except for that charge, my projections are in line with Merck’s 2023 financial outlook. They anticipate projected revenues of $58.2 billion, GAAP EPS of $2.34 and non-GAAP EPS of $3.32. My projections for 2024 now show $60.6 billion of revenues, up 4.0%; GAAP EPS of $6.44 and non-GAAP EPS of $7.51.
Since my last report (Apr. 3), the stock’s total return is 4.6%, better than the S&P 500’s 4.3% and the DRG’s 1.3%. However, its relative performance deteriorated in May, with the stock falling 7.3% from its intraday peak of $119.65 on May 3. Based upon my 2024 projections, I am maintaining my neutral rating and my price target of $109. The price target equates to a one-year forward multiple of 14.5, above the peer group average of 12.2 but in-line with Merck’s one-year forward multiple. Total return potential to the price target is about 1%.
This is a summary of my recent 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 2, 2023
Stephen P. Percoco
Lark Research
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