Merck raises forecast despite hits from cyberattack, even suggests deals could come

Merck CEO Kenneth Frazier lauded the company's achievements given the difficulties it faced this year, from a cyberattack that has crippled some of its manufacturing, to loss of patents on some key drugs.

The cyberattack that took out some of Merck & Co.’s manufacturing capabilities continues to haunt the drugmaker, costing it about $300 million in lost sales and expenses in the third quarter and requiring it to tap the CDC stockpile for supplies of its prized vaccine Gardasil 9 at a cost of $240 million. That and a $2.5 billion charge to set up a cancer deal with AstraZeneca led the U.S. drugmaker to a third-quarter loss.

But analysts were not particularly concerned with the “noise” around revenues, as one them described it. They concluded things look pretty good for the Big Pharma player, given a beat on EPS at $1.11, compared to consensus of $1.03, and Merck’s decision to narrow and raise its 2017 forecast about 1% to a range of $40. billion to $40.5 billion.

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“Revenues were a bit light at $10.33B compared to us ($10.51B) and consensus ($10.54B), but this quarter's revenues were a bit noisy, affected by various one-time pushes and pulls (on net, approx. negative $400M drag),” Bernstein analyst Tim Anderson told clients in a note today.

Anderson pointed out that Merck also expense about $175 in costs from the cyber attack and that it expects similar impacts in Q4. 

Another surprise was that sales from Merck’s immuno-oncology powerhouse Keytruda came in below consensus at $1.05 billion compared to an expected $1.06 billion, but executives during an analyst call said no worries, pointing out that recent script numbers show it continues to grow robustly.

“We are seeing continued growth in demand in Keytruda with one in three new lung cancer patients being started on Keytruda …” Adam Schechter, Merck president of human health, said on the call.

Meanwhile, sales of cholesterol drugs Zetia and Vytorin were off more than 50% as generics of Vytorin came into play.  

Merck CEO Kenneth Frazier said what the company achieved in the quarter “is particularly notable in a year in which we have been facing the combined loss of nearly $2.5 billion in patent protected sales, continued pricing pressures, an isolated but meaningful cyber incident, and most recently several natural disasters,” Frazier said.

Overall, the pushes and pulls left Merck’s pharma sales down 3% for the quarter, but that was offset by growth in animal health, which was up 14% and hit $1 billion for the quarter, the first time that has happened, CEO Kenneth Frazier pointed out.

In fact, during the call, Frazier pointed to animal health as a good business with solid margins and assured investors, that unlike a competitor, Merck sees it as a growth area for the company. 

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On the flip side, Merck saw its R&D costs rise significantly in the third quarter, hitting, $4.4 billion compared to $1.7 billion in the third quarter of 2016, primarily because of a $2.35 billion aggregate charge to create a collaboration with AstraZeneca over that company’s cancer drug Lynparza.

The company expects both R&D costs and general administrative costs to continue to rise next year, analysts were told, but the company continues to look for ways to manage those to offset those increases. In fact, earlier this month the drugmaker said it would cut 1,800 U.S. staffers as it jettisons three of its sales teams and launches a new chronic care salesforce.

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Asked whether there is a major acquisition in the future to assure continued growth apart from tremendous success of Keytruda, Frazier made clear that Merck is always looking, but is not interested in buys simply to drive sales or because of cost-cutting synergies. Any deal has to be for something that allows Merck to innovate, Frazier said, and the company is agnostic about what therapeutics categories from which that might come.

While Merck continues to see downward pressure on its is diabetes portfolio, with sales of type 2 diabetes medications Januvia and Junumet falling about 2% to $1.525 billion, Frazier said that business remains important as well and the company could add to it with M&A at some point.

“We measure success based on our ability to sustainably deliver differentiated medicines and vaccines, and we believe that long-term value creation is a direct function of our ability to deliver on the promise of innovation,” the CEO said.