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Earnings Preview: Healthcare Roundup with PFE, MRK, and GILD

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May 1, 2017
Pharmaceutical assortment
iStockphoto.com/Viperfzk

The week ahead could bring heightened volatility with it. On top of companies releasing first-quarter results, there’s a Fed meeting, monthly jobs data, and Congress keeps working to approve government funding by Friday’s deadline. Those are just some of the potentially market-moving events this week and on the earnings front, several major healthcare companies kick it off this week with Pfizer (PFE), Merck & Co. (MRK), and Gilead Sciences (GILD) reporting on Tuesday, May 2.

Pfizer Earnings and Options Activity

When PFE reports tomorrow, analysts will likely be digging into sales for the company’s top five products: Prevnar 13, Enbrel, Lyrica, Ibrance, and Eliquis. In 2016, these drugs generated roughly $17 billion in sales and their results might have an outsized effect on the company’s operations. Sales for Prevnar 13, its top-selling product, fell 8% in 2016 to $5.7 billion.        

Another area of focus is how its Anacor and Medivation acquisitions are affecting the bottom line. Eucrisa, obtained from the Anacor buyout, won U.S. regulatory approval in December for treating eczema. Management  has said it expects Eucrisa to eventually achieve peak annual sales of at least $2 billion, according to Reuters, and this will be the first quarter of the new drug’s sales. PFE also acquired Medivation for $14 billion in September 2016, which added prostate cancer drug Xtandi to its portfolio; despite a year-over-year sales decline in Q4, management indicated it thinks the drug still has strong future growth prospects on last quarter’s earnings call.    

Last quarter, the pharma giant missed Wall Street earnings expectations by $0.03 per share. For the first quarter, PFE is expected to earn $0.67 per share, the same as in Q1 2016, on revenue of $13.04 billion, according to consensus third-party analyst estimates.  

The options market has priced in just over a 1.3% potential stock move in either direction around the company’s earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading at the May 5 weekly expiration, calls were active at the 34 and 35 strike prices while puts were active at the 33.5 and 34 strikes. The implied volatility for PFE sits at the 19th percentile.

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 Business Divisions Compared to MRK

FIGURE 1: PFE VERSUS MRK DIVISONS AT END OF LAST QUARTER.

PFE has a large focus on consumer products that MRK doesn’t. Anti-infective drugs make up the largest portion of MRK’s business. The Trefis price estimate vs. current market price is as of 5/1/17. TD Ameritrade clients can analyze potential revenue drivers of a stock on the Fundamentals tab on the thinkorswim® platformTrefis 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.

Merck & Co. Earnings and Options Activity

Most of the focus has been on MRK’s newer drugs Keytruda, a cancer treatment, and Zepatier, a hepatitis C treatment. Zepatier sales have been growing, but it faces competition from similar products made by GILD and AbbVie (ABBV). Several analysts think both of MRK’s key drugs could see a boost in sales this quarter from international launches.

Looking ahead to the rest of 2017, management does see a few challenges. Increasing competition, loss of patent exclusivity, and foreign currency exchange headwinds are all anticipated to adversely impact operations. On last quarter’s earnings call, CFO Robert Davis said “while we are facing rapid erosion of sales from our products that have lost patent exclusivity, we will not get the full benefit of the ramp from new product launches, such as Keytruda and Zepatier, until the second half of 2017”. Davis also said he expects operating expenses to be heavier in the beginning of the year due to higher promotional expenses for Keytruda and the phasing of clinical spend.

For Q1, MRK is expected to report earnings of $0.83 per share, down from $0.89 in Q1 2016, on revenue of $9.29 billion, according to consensus third-party analyst estimates. That’s the lowest earnings estimate in the past 8 quarters for the pharmaceutical maker.

In short-term options trading at the May 5 weekly expiration, calls were active at the 62.5 and 64 strikes and there wasn’t a lot of activity on the put side. At the May 19 monthly expiration, calls were active at the 65 and 66 strikes and puts were active at the 60 and 62.5 puts. The implied volatility sits at the 66th percentile.

Gilead Sciences Q1 Earnings and Options Activity

GILD shares have been  battered over the past year as the company’s key hepatitis C treatments, Harvoni and Sovaldi, faced increasing competition. That appears to have led to declining revenues and earnings since Q1 2016. The company also lowered sales guidance for the year after last quarter’s worse-than-expected results. While there’s a lot of pessimism towards the company’s hepatitis C franchise, Mizuho analyst Salim Syed said the company’s oncology drugs help offset some of its recent sales troubles.    

When GILD reports after market close tomorrow, it’s expected to earn $2.24 per share, down from $3.03 in Q1 2016, on revenue of $6.66 billion according to consensus third-party analyst estimates. The revenue expectation is the lowest for the company out of its past 8 quarters. The stock is down almost 23% over the past year and has declined about 7.5% year to date, compared to an increase of 5.6% for the S&P 500 (SPX).

The options market has priced in about a 3.75% potential stock move in either direction around its earnings release, according to the Market Maker Move indicator. In short-term options trading at the May 5 weekly expiration, calls were active at the 68.5 strike price while puts were active at the 67 and 68 strikes. The implied volatility sits at the 52nd percentile.

GILD 1 Year Performance Compared to PFE, MRK and S&P 500

FIGURE 2: GILD 1 YEAR PERFORMANCE.

The performance of GILD over the last year compared to PFE (teal line), MRK (red line), and the S&P 500 (purple line). YTD performance as a percentage is shown on the right side of the chart. 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.

Good Trading,
JJ
@TDAJJKinahan

NC
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