Merck to spin off assets with USD6.5B in sales; Q4 profit up

AP – Drugmaker Merck beat Wall Street’s fourth-quarter profit expectations, but investors weren’t as happy with the biggest move Merck’s made in years: deciding to spin off its women’s health division and other operations with USD6.5 billion in annual revenues.

The maker of cancer blockbuster Keytruda announced the plan along with its quarterly results, saying the two resulting companies each would be able to grow faster and develop more new medicines, benefitting patients.

But investors sold off shares in heavy trading early Wednesday, pushing their price down more than four per cent initially.

The maneouver culminates a steady shift of Merck’s business the past several years from a primary care drugmaker with more than 160 products, to a company which will have half as many, focussed on its surging but young oncology business, and growing sales of its vaccine, hospital products and veterinary medicines.

At least three other major drugmakers — Pfizer, GlaxoSmithKline and AstraZenca — have announced plans over the past 14 months to pare off parts of their companies to increase sales and profit growth.

Chief Executive Kenneth Frazier said in an interview that the spinoff will ensure Merck & Co’s long-term growth, while the new company will have strong cash flow to expand in women’s health, which wasn’t getting enough attention.

File photo shows Merck corporate headquarters in Kenilworth, New Jersey on May 1, 2018. PHOTO: AP

The spinoff addresses a large market, Frazier said. “It’s got great opportunity and they’re intending to become a leader in women’s health.”

Mizuho analyst Mara Goldstein wrote to investors that the spinoff should drive higher revenue and dividend growth and increase profit margins.

“Strategically, we think this creates a more nimble company with which to dilute Keytruda’s dominance over time, but short term will concentrate those revenues,” she wrote.

The drugmaker on Wednesday reported net income of USD2.36 billion, or 92 cents per share, up from USD1.83 billion, or 69 cents per share, a year earlier. Adjusted earnings came to USD2.98 billion, or USD1.16 per share, beating projections from Wall Street analysts by a penny.

The maker of Januvia Type 2 diabetes pills reported revenue of USD11.87 billion, up eight per cent but below analysts’ expectations for USD11.98 billion.

Merck’s stock closed on Wednesday down USD2.53, or 2.9 per cent, at USD85.83, while broader markets were all up.

“We understand the strategic and financial logic of the planned (spinoff) but anticipate a rocky near-term share price reaction,” Citigroup analyst Andrew Baum wrote to investors.

Merck’s pharmaceutical business posted sales totaling USD10.53 billion in the fourth quarter. Cancer blockbuster Keytruda, one of the top new oncology drugs that boost the immune system to hunt and kill cancer cells, led sales bringing in USD3.11 billion in the quarter. For the year, it posted a whopping USD11.08 billion in sales, nearly 24 per cent of total company sales.

During the quarter, Merck received its 23rd approval for Keytruda in treating different cancer types and patient groups, this time in a type of bladder cancer.

Kenilworth, New Jersey-based Merck’s growing veterinary medicines business, which sells Bravecto flea and tick killer and Vetsulin insulin for dogs and cats, had sales of USD1.12 billion in the quarter, up eight per cent from a year earlier.

During the fourth quarter, Merck paid USD2.7 billion for ArQule, a company developing treatments for B-cell cancers, and won approval for Ervebo, the first vaccine against the Ebola virus. It’s being given to people in Congo to fight the epidemic there.

Merck said the spinoff of women’s medicines such as the Nexplanon birth control implant, older drugs including cholesterol treatments Zetia and Vytorin, and three biosimilars, or near-copies of expensive biologic drugs, is expected to be completed in the first half of 2021.

It will create a new company, expected to be based in New Jersey, via a tax-free distribution to Merck shareholders.

Merck expects to record USD1.5 billion in operating efficiencies by 2024 with the spinoff.

The company forecast adjusted annual net income of USD5.62 to USD5.77 per share, for all of 2020, and revenue ranging from USD48.8 billion to USD50.3 billion.

Analysts were expecting earnings of USD5.64 per share and revenue of USD46.4 billion.

For all of 2019, Merck posted net income of USD9.84 billion, or USD3.81 per share, on revenue of USD46.84 billion.