Merck Earnings Beat Analyst Estimates. Why the Stock Is Dropping.

Merck stock is down 33% over the past 12 months. (Dreamstime)

Merck stock slid Tuesday after the company’s earnings failed to ease growing worries about the impending expiration of the patents protecting its megablockbuster cancer drug, Keytruda.

The company on Tuesday announced new cost cuts—including job eliminations and a reduction of its real estate footprint—that would save Merck $3 billion annually. The company said it plans to spend those savings on product launches and its pipeline.

The realignment comes with the stock down 33% over the past 12 months as of the end of the day on Monday. The stock slid 5.1% in recent trading Tuesday.

In 2028, rivals will launch biosimilar competitors to Keytruda, a drug that accounted for 47% of Merck’s sales last year. The company has been struggling to reassure investors it can fill such a major revenue hole.

Results for the second quarter were a bit better than expected. Non-GAAP earnings were $2.13 per share, better than the $2.02 per share FactSet consensus estimate. Sales were $15.8 billion, roughly in line with the $15.9 billion expectation.

The quarter’s results, however, are largely beside the point.

In comments on an investor call early Tuesday, Merck CEO Rob Davis said he still thinks the company can handle the expiration of the Keytruda patent.

“My confidence in our ability to successfully navigate the Keytruda [patent expiration] period increases with each new launch, data readout and business development transaction,” Davis said. “I continue to see the LOE [loss of exclusivity] as more of a hill than a cliff.”

Investors didn’t appear to share that optimism, as the stock dropped during the morning.

One major worry is Gardasil, the company’s human papillomavirus, or HPV, vaccine. China sales of Gardasil have been an issue since last summer, and Merck hasn’t been shipping new doses there. Gardasil sales were $1.1 billion in the second quarter, down 55% since the same quarter last year, and short of the $1.4 billion consensus estimate.

The company said that in addition to the issues in China, sales of Gardasil outside of China were down 3%. Merck said Tuesday that demand in China “continues to be soft,” and that the company won’t ship doses there through at least the end of this year.

In addition to the existing Gardasil troubles, there is also worry that the vaccines advisory committee of the Centers for Disease Control and Prevention could reduce the number of doses of Gardasil it recommends for U.S. patients. That change had been in the works since before the health secretary, Robert F. Kennedy, Jr., replaced all the members of the committee, and is pending.

“We see continued risk to the Gardasil franchise,” Leerink Partners analyst Daina Graybosch wrote early Tuesday.

Keytruda sales were $8 billion in the quarter, up 9% from the same quarter last year.

The company narrowed its full-year sales guidance range on Tuesday, saying it now expects sales in the range of $64.3 billion to $65.3 billion compared with a prior range of $64.1 billion to $65.6 billion. Merck also raised the bottom end of its adjusted earnings guidance range, calling for earnings of $8.87 to $8.97 a share as opposed to $8.82 to $8.97. The company clarified that $200 million of tariff-related costs included in its previous outlook remain unchanged.

The company didn’t offer details on its new spending cuts. It said it would cut administrative, sales, and research and development, but would hire in other areas. It said it would also reduce its real estate footprint.

Early this month, Merck announced a $10 billion deal to buy Verona Pharma, which sells a lung disease drug called Ohtuvayre. Analysts expect Ohtuvayre sales to grow significantly in the coming years, and Davis said at the time that the acquisition “is another step in positioning us to successfully navigate the Keytruda [loss of exclusivity] over time.”

Meanwhile, though, other challenges are mounting to Merck’s plans. One question is the fate of the new version of Keytruda that can be injected quickly into the skin. It would compete with the biosimilar versions of the original Keytruda that will arrive in 2028.

That same year, Medicare could start paying lower prices for Keytruda through the new price negotiation program. Merck had thought the injectable Keytruda wouldn’t be eligible for the lower, negotiated Medicare price for many years. Guidance that arrived in May from the Centers for Medicare and Medicaid Services, however, suggested the injectable Keytruda might actually be subject to the lower negotiated Medicare price at the same time as the older version of the drug.

That would dramatically erode the diminished Keytruda revenue the company, and investors, had been counting on after 2028.

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com and Mackenzie Tatananni at mackenzie.tatananni@barrons.com