Merck Lifts Outlook on a Lower Tax Rate: Rapid Earnings Reaction

Merck's(NYSE:MRK) third-quarter sales rose 5% to about $18.1 billion, but the company says about $550 million of the gain came from the timing of customer purchases. Shares rose about 5% in Thursday morning trading. Strip out that timing and sales barely grew. The encouraging part is that the Keytruda Qlex shot and Winrevair are now scaling fast enough to offset steep generic losses on older drugs.

Key Numbers

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• Sales: about $18.1 billion, up 5% from a year ago

• Keytruda Qlex sales: $830 million, up from $463 million last quarter

• Winrevair sales: $694 million, up 93% from a year ago

• EPS: $2.04 GAAP, down 12%; $2.49 adjusted, down 3%

What It Means

Purchase timing flatters this quarter. When wholesalers and public buyers order early, sales land now instead of later, and that often shows up as a softer quarter down the road. Generics are hollowing out Januvia and Bridion after both lost U.S. exclusivity. Bridion sales fell 67%.

Keytruda's 6% growth hides a handoff. Sales of the original IV version fell, while patients shifted to Qlex, which is injected under the skin. That shift matters more than anything else in this report. Merck is counting on Qlex's separate patents to protect part of the franchise after Keytruda's main U.S. patent expires in 2028.

Profit fell because spending outran sales. Merck spent more on launches and research, and interest expense climbed. A lower tax rate softened the hit, and it also does much of the lifting in the raised full-year earnings outlook. Merck now expects a non-GAAP tax rate of 32% to 33%, down from 35% to 36%.

What to Watch Next

Watch whether fourth-quarter sales give back the timing benefit. Also track Qlex's share of Keytruda sales, now nearly 10%.

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