Will Higher Keytruda Sales Drive Merck’s Q1

Merck (NYSE: MRK) will report its Q1 2024 results on Thursday, April 25. We expect the company to post revenue of $15.2 billion and adjusted earnings of $1.97, slightly ahead of the street estimates. As usual, Keytruda will be the driving growth for Merck with quarterly sales estimated to be around $7 billion, reflecting y-o-y growth in the high teens. Merck’s HPV vaccine – Gardasil – is expected to see its sales rise in the mid-teens. Although we expect Merck may post a slight upbeat Q1, we think its stock is appropriately priced at levels of around $130. Our interactive dashboard analysis of Merck’s Earnings Preview has more details on how the company’s revenues and earnings will likely trend for the quarter. So, what are some of the trends that are likely to drive Merck’s results?

Firstly, let us look at Merck’s stock performance in recent years. MRK stock has seen strong gains of 55% from levels of $80 in early January 2021 to around $125 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.
However, the increase in MRK stock has been far from consistent. Returns for the stock were -6% in 2021, 45% in 2022, and -2% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that MRK underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MRK face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, Merck looks appropriately priced. We estimate Merck’s Valuation to be $134 per share, close to its current market price of $127. At its current levels, MRK is trading at 5x revenues, compared to the 4.5x average over the last five years.

Looking at the previous quarter, Merck’s revenue of 14.6 billion, up 6% y-o-y, is primarily due to higher sales of Keytruda and Gardasil. While Keytruda sales surged 20% y-o-y to $5.8 billion, Gardasil saw a significant 35% rise to $2.0 billion. Merck reported an adjusted profit of $0.03 per share, compared to $1.62 in the prior year quarter. Note that the previous quarter earnings include a one-time charge of $1.69 per share related to the company’s collaboration with Daiichi Sankyo. The company expects full-year 2024 revenue to be in the range of $62.7 billion to $64.2 billion and earnings to be in the range of $8.44 to $8.59 per share.

Coming to the latest quarter, Keytruda and Gardasil remain the key growth drivers. Keytruda has garnered five new U.S. FDA approvals since October last year, and this  should aid its sales growth. Gardasil is seeing strong demand in China, a trend expected to continue in the near term. However, the company will continue to face generic competition for its diabetes drugs – Januvia/Janumet – in Europe. It will be interesting to see how the operating margin trends for Merck in Q1, given that the company’s management stated a likely expansion for this metric in 2024.