Merck to spin off assets with $6.5 billion in sales
Investors unmoved by drugmaker’s fourth quarter profits
Drugmaker Merck beat Wall Street’s fourth-quarter profit expectations, but investors weren’t as happy with the biggest move Merck’s made in years: deciding to spin off its women’s health division and other operations with $6.5 billion in annual revenues.
The maker of cancer blockbuster Keytruda announced the plan along with its quarterly results, saying the two resulting companies each would be able to grow faster and develop more new medicines, benefiting patients. But investors sold off shares in heavy trading early Wednesday, pushing their price down more than 4% initially.
The maneuver culminates a steady shift of Merck’s business the past several years from a primary care drugmaker with more than 160 products, to a company which will have half as many, focused on its surging but young oncology business, and growing sales of its vaccine, hospital products and veterinary medicines.
At least three other major drugmakers — Pfizer, GlaxoSmithKline and AstraZenca — have announced plans over the past 14 months to pare off parts of their companies to increase sales and profit growth.
Chief Executive Kenneth Frazier said in an interview that the spinoff will ensure Merck & Co.’s long-term growth, while the new company will have strong cash flow to expand in women’s health, which wasn’t getting enough attention.
The spinoff addresses a large market, Frazier said. “It’s got great opportunity and they’re intending to become a leader in women’s health.”
Mizuho analyst Mara Goldstein wrote to investors that the spinoff should drive higher revenue and dividend growth and increase profit margins.
“Strategically, we think this creates a more nimble company with which to dilute Keytruda’s dominance over time, but short term will concentrate those revenues,” she wrote.
The drugmaker on Wednesday reported net income of $2.36 billion, or 92 cents per share, up from $1.83 billion, or 69 cents per share, a year earlier. Adjusted earnings came to $2.98 billion, or $1.16 per share, beating projections from Wall Street analysts by a penny.
The maker of Januvia Type 2 diabetes pills reported revenue of $11.87 billion, up 8% but below analysts’ expectations for $11.98 billion.
In afternoon trading, shares were down $2.80, or 3.2%, at $85.56, while broader markets were all up.
“We understand the strategic and financial logic of the planned (spinoff) but anticipate a rocky near-term share price reaction,” Citigroup analyst Andrew Baum wrote to investors.
Merck’s pharmaceutical business posted sales totaling $10.53 billion in the fourth quarter. Cancer blockbuster Keytruda, one of the top new oncology drugs that boost the immune system to hunt and kill cancer cells, led sales, bringing in $3.11 billion in the quarter. For the year, it posted a whopping $11.08 billion in sales, nearly 24% of total company sales.