Merck & Co.’s (MRK) profitability was affected by the ~1% decrease in revenues in 1Q16. Adjusted net income increased to $1.5 billion in 1Q16, compared to $1.3 billion in 1Q15.
The company surpassed analysts’ estimates for adjusted net income and earnings per share in each quarter over the last two years.
Changes in profit margins
Gross margin decreased by 0.5% to 61.6% in 1Q16 compared to 62.1% for 1Q15. Gross margin was driven by increased costs of sales due to the unfavorable impact of acquisitions and divestitures and restructuring costs. The operating profit margin improved by ~2.7% to 17.9% in 1Q16 compared to 15.2% in 1Q15.
Marketing and administrative expenses declined to $2.3 billion in 1Q16, compared to $2.6 billion in 1Q15. The decline was due to the favorable impact of foreign exchange and the divestment of its Consumer Care business. Research and development expenses decreased by 6% compared to 1Q15, following lower licensing expenses. Other income decreased to $48 million for 1Q16.
Revised financial guidance
Merck revised its 2016 adjusted EPS (earnings per share) to $3.65–$3.77, including a negative foreign exchange impact. Merck also raised its midpoint for revenues and narrowed the range to $39.0 billion–$40.2 billion for 2016. This revenue estimate includes a negative foreign exchange impact of 2%.
Merck expects its marketing and administrative expenses to be lower in 2016 over 2015. However, the company expects R&D (research and development) expenses to be slightly above 2015 levels.
Merck, Johnson & Johnson (JNJ), Pfizer (PFE), and GlaxoSmithKline’s Indian subsidiary (GSK) have announced share repurchases of $10 billion, $11.7 billion, $13.0 billion, and ~$1.0 billion, respectively, over the last two years.
Investors can also consider the Health Care Select Sector SPDR ETF (XLV), which holds 5.8% of its total assets in Merck and is focused on pharmaceuticals and healthcare companies.
In the final part of our series, we’ll see if Merck’s recent new developments can make a difference.