Merck's Q2 Good, But Not Good Enough, Says BMO

Merck's quarterly revenue was about 1 percent above consensus and 1.5 percent above BMO's forecast, while EPS of $0.93 was a couple of pennies above consensus and 10 percent above the BMO estimate.

"Overall, it was a good quarter; however, the top- and bottom-line beats were driven by a number of nonrecurring items (e.g., $60–70 million hedging gains and a $115 million patent settlement); thus, we argue that the beat was low quality," analyst Alex Arfaei wrote in a note.

However, the analyst said most key franchises, such as Keytruda, Januvia and Remicade/Simponi, performed well, while some, such as Zepatier/hep-C, were light.

In the near term, investors are focusing on the Keytruda 1L NSCLC results, which should be published soon, and the competing Bristol-Myers Squibb Co BMY data expected within weeks.

Related Link: Investors Greet Merck Q2 Results As Key Launches Help Beat

"While we believe that Merck's Keytruda will be more competitive in 1L NSCLC, relative to 2L+, Bristol's Opdivo should end up with the broader label and continue to dominate NSCLC," Arfaei noted.

Further, Arfaei still sees following significant uncertainties affecting Merck, including:

• "Keytruda's uptake in 1L NSCLC relative to Opdivo, the potential impact of Lilly's Jardiance CV label expansion on Merck's Januvia franchise"
• "Increased biosimilar pressure on Remicade"
• "Economic slowdown in EU (24 percent of Merck's Pharma business)"
• "Perhaps an expensive deal"

"We continue to believe that management is preparing investors for a relatively large deal, but the timing remains uncertain," the analyst added.

Despite being cautious about Merck's 2016 hep-C guidance of about $650 million, Arfaei expects Merck to finish 2016 at the top end of its guidance.

The company guided EPS of $3.67–$3.77 on revenue of $39.1 billion–$40.1 billion. BMO expects EPS of $3.77 (up from $3.71) on revenue of $39.97 billion (up from $39.62 billion).

At the time of writing, shares of Merck were up 0.58 percent to $59.00. Arfaei has a price target of $62.