3 Important Questions We Want Answered When Merck Reports Its Q2 Results

Source: Merck.

Earnings season is now well under way, and the biggest names in healthcare (i.e., Big Pharma) are readying to report their results in the upcoming days. One such pharmaceutical giant that Wall Street and investors should have their eyes on is Merck (MRK -0.05%).

Based on a press release from late June, Merck will be releasing its second-quarter earnings results before the opening bell on Tuesday, July 28. The current consensus estimate on Wall Street calls for Merck to earn $0.80 in EPS on $9.78 billion in sales. On a year-over-year basis, Merck's sales are projected to fall by a hair over 10%, while its EPS is estimated to contract by $0.05 per share. But, if history is any guide, investors might be looking for an earnings beat come July 28, with Merck surpassing Wall Street's EPS estimates in 10 of the past 11 quarters, and by a sizable $0.10 per share in Q1 2015.

Three important questions we want answered
Although investors will obviously be focused on these headline numbers, it's even more important to understand the dynamics of how Merck arrived at its top-line and bottom-line figures. With that in mind, let's briefly look at three important questions that we as investors would like to see Merck answer when it reports its Q2 results.

1. Is Keytruda's ramp-up still on track?
Arguably the hottest trend in drug development right now is the ongoing research surrounding cancer immunotherapies as both monotherapies and combo therapies. Merck's checkpoint inhibitor Keytruda is one such drug that holds a bounty of potential given its ability to supercharge a cancer patient's immune system to more effectively kill cancer cells.

Source: Merck.

Approved last September, Keytruda sales have ramped up quickly. Following just $4 million in sales in its partial third-quarter, Keytruda tallied $50 million in sales in Q4, and $83 million in the first-quarter of this year. More importantly, Keytruda sales have trumped that of its checkpoint inhibitor rival Opdivo from Bristol-Myers Squibb in the early going.

What investors will be looking for in the second-quarter is confirmation from Merck that its roughly 30 planned monotherapy and combo trials involving Keytruda are still on track to be completed in the coming years; that insurer coverage of the expensive immuno-oncology drug remains high (Keytruda has an annual wholesale cost of $150,000); and that sequential growth for Keytruda remains strong.

What specific figure should investors be looking for? While Wall Street's estimates vary wildly, I'll personally be looking for 40% to 50% sequential quarterly sales growth for Keytruda, or in the neighborhood of $120 million in sales.

Also pay attention to any color that Merck can add for full-year Keytruda sales. Halfway through its fiscal year, and three full quarters into its ramp-up, Merck should be able to provide analysts with some rough estimate of how much revenue it expects from Keytruda in its first full year on the market.

2. Is Merck's bolt-on strategy going to pay dividends?
It's no secret that Big Pharma companies are struggling with a record number of patent losses, and many, like Merck, are turning to acquisitions to soften the blow of revenue losses and to diversify their product portfolios and pipelines. But, what investors are curious about is if all of Merck's aggressive acquisitions are going to pay dividends for shareholders anytime soon.

Over the past year (and change) Merck has made two billion-dollar acquisitions: Cubist Pharmaceuticals for $8.4 billion and Idenix Pharmaceuticals for $3.85 billion.

Source: Merck via Facebook.

The deal to buy Cubist was designed to boost Merck's focus on acute care hospital therapies, which tend to be profitable and should have a strong long-term outlook with the Affordable Care Act lowering the uninsured rate and making it easier for the average American to get medical care.

The more intriguing deal, and the big question mark, is Merck's purchase of Idenix. Merck would up purchasing Idenix for more than a 235% premium from its prior-day closing price despite the fact that Idenix hasn't moved any of its hepatitis C products beyond midstage studies. Additionally, Idenix had also dealt with four separate clinical holds from the Food and Drug Administration in recent years, throwing more doubt into Merck's aggressive acquisition.

Specifically, investors will be looking for commentary from Merck regarding the progress of its overall hepatitis C pipeline -- remember, Merck filed for a new drug application for its HCV combo therapy of grazoprevir and elbasvir in May -- as well as how Idenix's hepatitis C research is expected to compliment Merck's hepatitis C pipeline in the coming years.

3. Are Januvia/Janumet holding their own amid increased competition?
Finally, investors are likely going to be curious about whether or not Merck's blockbuster diabetes drug Januvia, which is known as Janumet overseas, was able to grow in the second quarter.

Source: Merck via Facebook.

Last year, Januvia/Janumet accounted for $6 billion out of Merck's $36 billion in total pharmaceutical sales, so to say its diabetes platform is important would be a drastic understatement. But, Januvia/Janumet, which is a DPP-4 inhibitor, is facing a competitive marketplace with the introduction of SGLT-2 inhibitors, which work in the kidneys as opposed to the liver and pancreas. In 2013, following the introduction of this new class of diabetes drug, sales growth of Januvia/Janumet flattened.

However, Merck's beefed up marketing geared at maintaining its dominant DPP-4 market share and fending off competitors, coupled with an update from the Food and Drug Administration in May that SGLT-2 inhibitors can lead to a condition known as ketoacidosis in patients which may require hospitalization, could have provided a serious boost to Januvia/Janumet sales during the quarter. Investors will be looking for signs of confidence from Merck's management team that its blockbuster diabetes drug isn't losing market share.

Focusing on the horizon
Although Merck's Q2 report has the potential to move its stock price up or down in the near-term, a majority of investors realize this is a long-tail turnaround story.

Following the loss of patent protection on asthma attack prevention therapy Singulair, a blockbuster drug for Merck that raked in $3 billion-plus per year in sales, Merck has been scrambling to find ways to "fill the gap," so to speak. However, sans acquisitions, filling in billions of dollars in lost revenue in a short period of time isn't easy. Keytruda could certainly go a long way toward bridging that gap, as could the approval of its hepatitis C combo therapy. But, Merck shareholders need to understand that this is a long-term investment that looks toward the horizon, and not a six-month investment where you click the buy button and see what happens.

I personally wouldn't be surprised if Merck surprised to the upside on the heels of strong Keytruda and Januvia/Janumet sales, but I'd suggest investors maintain their current investment thesis on Merck until after its results are released and analyzed on July 28.