Earnings: What’s In the Medicine Cabinets of PFE, LLY, MRK?

Big pharma on tap this week: PFE, LLY, MRK. Here’s a look at what might be expected.

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Three big names in big pharma are on the earnings agenda this week with Pfizer (PFE) scheduled to report earnings Tuesday, Eli Lilly (LLY) on Wednesday and Merck (MRK) on Friday. AbbVie posted strong quarterly earnings last Friday that some analysts said might be a precursor for some other big pharmas.

Pfizer Earnings and Options Trading Activity

PFE, which is slated to report before the bell, has a Feb. 1 deadline still in place for bids on its consumer healthcare business, which the company said it’s considering selling or spinning off. The division, which includes familiar products such as Advil, Centrum and Chapstick, is expected to generate bids in the $20 billion range, according to Reuters. Johnson & Johnson (JNJ), which some analysts expected to be a strong contender for the business and has purchased other businesses from PFE, is officially out of the race, Reuters reported.

Who might still be in it? On Friday, other published reports said a deal was near. It will be interesting to see if PFE executives address the issue on the conference call. Some analysts said they also will be listening for information on oncology drug sales, particularly Ibrance, as well as others such as Prevnar, Eliquis and Lyrica. 

PFE has had a good track record on earnings in the last year,  which surprised Wall Street’s expectations in all three of the last quarters. In the third quarter, PFE posted earnings per share of $0.67, which was ahead of the $0.65 a share analysts had projected. Revenues were in line with expectations at $13.17 billion.

For the fourth quarter, the consensus earnings estimate from third-party Wall Street analysts is $0.56, which is higher than the year-ago profit of $0.47 a share, according to the Earnings Analysis tab on the thinkorswim® platform from TD Ameritrade. Revenues are projected to reach $13.6 billion, roughly in line with last year’s report. However, PFE might get a boost to earnings from writing down its deferred tax liabilities to reflect the lower tax rates, according to Marketwatch. PFE is among a handful of companies with the largest net deferred liability balances as of the end of 2016, the report said.

The options market has priced in an expected share price move of 2.9% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Call activity has been higher at the 40 strike while put activity has been concentrated at the 36-strike. The implied volatility sits at the 100th percentile, its highest volatility level all year. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

PFE Company snapshot, 2018

FIGURE 1: PFE’S BET ON DRUGS.

PFE has said it wants to focus its business on its core pharmaceutical business. The oncology drug division, which includes medications such as Ibrance, represents the largest drug division. Chart source: thinkorswim® by TD Ameritrade.  Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Eli Lilly Earnings and Options Trading Activity

LLY’s fourth-quarter results will include the impact of 2017 patent expirations for Strattera, which treats ADHD, its blood clot medicine Effient, and Axiron, which is a testosterone treatment. But it noted on the third-quarter conference call that its 9% revenue growth then was attributed to volume growth in its newest products.

In the third quarter, LLY said its diabetes drugs Forteo and Trajenta had sales gains of 15% and 23%, respectively, while sales of its cancer drug Cyramza were up nearly 27% year over year.

In the third quarter it reported earnings of $1.05 a share, ahead of the $1.03 a share Wall Street was expecting. Revenues came in at $5.66 billion, also better than the $5.52 billion forecast.

Revenue for the fourth-quarter is expected to reach $5.96 billion, compared with the $5.76 billion it made a year ago, according to the consensus earnings estimate from third-party Wall Street analysts, as charted on the Earnings Analysis tab on the thinkorswim® platform from TD Ameritrade. Earnings per share are projected to reach $1.07 a share compared with last year’s profit of $0.99 a share.

The options market has priced in an expected share price move of 1.8% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Recent option trading has been heaviest in the 86-strike puts. The implied volatility sits at the 52nd percentile. (Please remember past performance is no guarantee of future results.)

Merck Earnings and Options Trading Activity

At a time when healthcare stocks have mostly booked big increases, MRK’s year-over-year stock gain sits under 2%. But it has recovered from bottoming in late November with a near-16% advance since then.

At JPMorgan’s Healthcare Conference in early January, Chief Executive Ken Frazier said, “We believe Merck is in a very good place right now,” according to the transcript from the conference. “Coming out of last year, which was a high pace and high performance year, we were able to grow notwithstanding about $2.5 billion worth of patent expirees through the first three quarters as well as other issues that impacted our business.”

The consensus earnings estimate from third-party Wall Street analysts is $0.94, which is above the year-ago profit of $0.89 a share, according to the Earnings Analysis tab on the thinkorswim® platform from TD Ameritrade. Revenues are projected to reach $10.45 billion, ahead of the $10.11 billion in the year-ago quarter.

The options market has priced in an expected share price move of 2% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Call activity has been highest at the 62- and 65-strikes while put activity has been highest at the 60-strike. The implied volatility sits at the 80th percentile. (Please remember past performance is no guarantee of future results.)

Healthcare sector and big pharma stocks

FIGURE 2: BIG PHARMA’S ROCKY ROAD.

The S&P Healthcare (in green and red) has advanced 32% on a year-over-year basis, but not all big pharma stocks have fared as well. PFE (purple line) is up nearly 25% while LLY (blue line) has advanced better than 16%. MRK has struggled, up 1% on the year, but off its November lows. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Looking Ahead

Microsoft (MSFT), Facebook (FB), Amazon (AMZN), Apple (AAPL) and Alphabet (GOOGL) are just a few of the tech companies scheduled to report earnings as we move into February this week. There were some big stock moves in the third quarter during the week when all these companies reported.

Good Trading,
JJ
@TDAJJKinahan

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