Analyst Makes Bearish Call On Merck’s Earnings Report

Merck (MRK) like any other large pharmaceutical company finds its core competency in a powerful research & development department. However, in recent quarters, Merck has seen the output of its R&D decrease as the pressure has now mounted for the company to develop more drugs and get them approved. Since 2011, seven of Merck’s patents, responsible for $10 billion annually, expired. Because of these factors and an increase in competition from generics, analysts are expecting a smaller growth in earnings this quarter and a decrease in revenue.

Merck is expected to report FQ3 2013 earnings on October 28th before the market open. The information below is derived from data submitted to the Estimize platform by a set of Buy Side and Independent analyst contributors.

The current Wall Street consensus expectation is for MRK to report $0.88 EPS and $11.110B revenue while the current Estimize consensus from 70 Buy Side and Independent contributing analysts is $0.89 EPS and $11.270B revenue. The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case, we’re seeing a smaller differential between the Estimize and Wall Street numbers compared to previous quarters.

Over the past four months the Wall Street consensus trend for EPS has risen from $0.82 to $0.88 while Wall Street revenue expectations have decreased from $11.220B to $11.110B. The Estimize EPS and revenue consensus have surged throughout the quarter with EPS going from $0.84 to $0.89 and revenue decreasing from $11.271B to $11.270B.

Over the previous 6 quarters, MRK has beaten the Wall Street consensus for EPS 6 times while beating the Wall Street Revenue consensus 5 times. Over the same time period MRK has beaten the Estimize EPS consensus 4 times and the Estimize Revenue consensus 6 times.

The distribution of estimates published by analysts on Estimize range from $0.88 to $0.90 EPS and $11.131B to $11.600B revenues. We’re seeing a smaller distribution of estimates this quarter for MRK than normal. The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A narrower distribution signaling the potential for greater volatility post earnings, a wider vice versa.

The analyst with the highest estimate confidence rating this quarter is Anthony who projects $0.90 EPS and $11.600B revenue. Estimate confidence ratings are calculated through algorithms developed by our deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy.

With revenue decreasing by 23% over the last four quarters, all analysts are watching to see if Merck can pull themselves out of their quandary with either a new drug or by following Pfizer’s strategy of splitting up its different departments and focusing mainly on pharmaceutical production. Recently, Merck has begun working with Pfizer to create a new drug, Ertugliflozin, for the treatment of diabetes type II. The real success of the company in the quarter following this one will depend on this drug’s success. With a growing global market for diabetes drugs and treatments, Ertugliflozin’s success or failure can make or break Merck.

Get access to estimates for Merck published by your Buy Side and Independent analyst peers, and register to create your own estimates by heading over to Estimize now.