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Merck & Co.’s Profitability in 3Q16

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Profitability margins

Merck & Co.’s (MRK) profitability improved thanks to a 5% increase in its 3Q16 revenues. The adjusted net income increased to ~$2.3 billion in 3Q16, compared to ~$1.8 billion in 3Q15.

The company beat analysts’ estimates for adjusted net income in the last few quarters. Its gross margin saw an ~4.6% improvement at 68.0% in 3Q16, compared to 63.4% for 3Q15, driven by a lower cost of sales due to net favorability from acquisitions and divestitures. The operating profit margin saw an ~5.5% improvement to 27.6% in 3Q16, compared to 22.1% in 3Q15.

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The marketing and administrative expenses fell to ~$2.4 billion in 3Q16, compared to ~$2.5 billion in 3Q15, due to the favorable impact of foreign exchange and divestment of the Consumer Care business. Also, the research and development expenses increased 11% compared to 3Q15, following the increased spending on R&D activities during 3Q16 and partially offset by foreign exchange.

The company reported other expenses of $22 million for 3Q16, compared to other income of $170 million for 3Q15.

Financial guidance

Merck revised its fiscal 2016 adjusted EPS range to be $3.71–$3.78, including a 1% negative impact of foreign exchange. Merck also raised its midpoint for revenues and narrowed the range to $39.7 billion–$40.2 billion for fiscal 2016. This revenue estimate includes a 2% negative impact from foreign exchange.

Merck expects the marketing and administrative expenses to be lower for 2016 compared to 2015. However, the company expects R&D expenses to be modestly above the 2015 levels.

Investors can consider the Vanguard Health Care ETF (VHT), which is focused on pharmaceutical and healthcare companies, and holds 5.1% of its total investments in Merck & Co., 2.9% of its investments in Allergan (AGN), 3.6% in Gilead Sciences (GILD), and 6.9% in Pfizer (PFE).

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