Merck & Co., Inc. MRK reported fourth-quarter 2017 adjusted earnings of 98 cents per share, which beat the Zacks Consensus Estimate of 94 cents by 4.3%. Earnings rose 10.1% year over year as slightly higher sales, lower taxes and higher other income made up for higher R&D costs in the quarter.

Including a $2.6 billion provision related to U.S. tax reform, fourth-quarter 2017 loss per share was 32 cents compared with a loss of 22 cents per share in the fourth quarter of 2016.

Revenues for the quarter rose 3% year over year to $10.43 billion. Sales, however, slightly missed the Zacks Consensus Estimate of $10.45 billion. Currency movement positively impacted revenues by 1%. Excluding currency impact, sales rose 2% year over year.

Lost sales in some markets due to a network cyber-attack in June hurt the top line. However, sales in the quarter were boosted by the addition of sales from the terminated (December 2016) vaccine joint venture with Sanofi SNY in Europe (approximately $140 million).

Quarter in Detail

The Pharmaceutical segment generated revenues of $9.29 billion, up 4% (up 3% excluding FX impact) year over year as continued strong sales of PD-1 inhibitor, Keytruda and Bridion offset lower sales of key vaccines - HPV vaccine Gardasil/Gardasil 9 in the United States and Zostavax (prevention of shingles). As in the previous quarters, loss of market exclusivity for several drugs also hurt the top line.

Keytruda, the second-largest product in the Merck portfolio, brought in sales of $1.3 billion in fourth-quarter 2017, up 23.5% sequentially and 169% year over year. Sales continued to be driven by the launch of new indications globally. Keytruda sales are gaining particularly from strong momentum in the indication of first-line lung cancer as it is the only anti-PD-1 approved in the first-line setting.

Keytruda is already approved for many types of cancers and treatment settings including lung cancer, melanoma, head and neck cancer, classical Hodgkin’s lymphoma and bladder cancer.

The Keytruda development program also significantly advanced in 2017 with regulatory approvals for six new indications in the United States, four in Europe and three in Japan. The approvals expanded the patient population, driving sales higher.

Zepatier brought in sales of $296 million, down from $468 million in the previous quarter.

Bridion (sugammadex) Injection generated sales of $209 million in the quarter, up 50% year over year, driven by strong demand.

Meanwhile, combined sales of Remicade (lost exclusivity in Europe and facing stiff biosimilar competition in the region), Cancidas (lost exclusivity in Europe in 2017), Zetia (lost market exclusivity in the United States in December 2016) and Vytorin (lost U.S. exclusivity in April 2017) declined $500 million in the quarter.

Remicade sales declined 31% to $186 million in the quarter. Merck markets the branded version of Remicade outside the United States while Johnson & Johnson JNJ markets the rheumatoid arthritis drug within the country.

Cancidas sales plunged 37% to $95 million in the quarter. The Zetia/Vytorin franchise recorded sales of $509 million, down 42% due to loss of exclusivity for both Zetia and Vytorin.

Sales of Isentress also declined in the quarter while the Januvia/Janumet (diabetes) franchise remained soft in the quarter.

The Januvia/Janumet franchise recorded sales of $1.52 billion in the quarter, up 1% from the year-ago quarter as higher global volumes partially offset the impact of continued pricing pressure.

Isentress sales declined 9% in the quarter to 308 million. Lower volumes/demand due to competitive pressure hurt sales of Isentress.

Gardasil/Gardasil 9 sales rose 17% to $633 million as lower sales in the United States were offset by commercial launch in China and strong growth in Europe. Unfavorable timing of public sector purchasing and partial replenishment of borrowed doses of Gardasil/Gardasil 9 into the U.S. Centers for Disease Control and Prevention’s (CDC) stockpile adversely impacted Gardasil’s sales in the United States. However sales rose in Europe were boosted by the addition of sales from the terminated vaccine joint venture with Sanofi.

Zostavax sales declined 45% to $121 million in the quarter as it faced strong competition from Glaxo’s GSK newly approved shingles vaccines, Shingrix.

Merck’s Animal Health segment generated revenues of $981 million, up 11% (up 14% excluding FX impact) from the year-ago quarter, primarily driven by higher sales of companion animal products, primarily Bravecto, companion animal vaccines and growth in the ruminants business.

Gross Margins Decline & R&D Costs Increase                    

Adjusted gross margin came in at 74.6%, down 20 basis points (bps) from the year-ago quarter.

Marketing and administrative (M&A) expenses were flat at $2.6 billion in the reported quarter Research and development (R&D) spend increased 18% to $2.1 billion in the quarter due to increased investment in pipeline and early drug development. Higher business development expenses also raised R&D costs in the quarter.

2017 Results

Full-year 2017 sales of $40.12 billion missed the Zacks Consensus Estimate of $40.23 billion. Revenues were within the guidance range of $40.0 billion – $40.5 billion. Sales rose 1% year over year.

Adjusted earnings for 2017 were $3.98 per share, which beat the Zacks Consensus Estimate of $3.95 per share as well as the guidance range of $3.91–$3.97. Earnings rose 5.3% year over year.

2018 Guidance

Revenues are expected in the range of $41.2 billion – $42.7 billion in 2018. The Zacks Consensus Estimate stands at $41.28 billion. The revenue guidance includes approximately 1% positive impact from currency fluctuation.

The company expects adjusted earnings in the range of $4.08–$4.23. The Zacks Consensus Estimate is pegged at $4.09 per share. The adjusted earnings guidance includes approximately 1% negative impact from currency fluctuation.

Adjusted operating expenses are expected to increase year over year at a low- to mid-single digit rate.

Merck also said that on expectation of an improved cash position following the tax reform, it plans to invest approximately $12 billion over the next five years in capital expenditures. Approximately $8 million of this investment will be made in the United States.

Our Take

Merck’s fourth-quarter results were mixed as the company beat estimates for earnings but missed the same for sales. It also issued in-line guidance for 2018.

Shares were down slightly in pre-market trading. In the past year, Merck’s shares have underperformed the industry. Merck’s shares have declined 6.9% in the period, comparing unfavorably with a 20.8% increase for the industry.

All eyes were on the performance of Keytruda, which is being touted as a key long-term growth driver for Merck. The drug continued its robust performance on strong demand trends. However, the significant decline in sales of Zostavax due to rising competitive pressure was a concern. Meanwhile, generic competition for several drugs and pricing pressure will continue to be overhangs on the top line.

Merck carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.