Pharmaceutical giants Pfizer (PFE) and Merck (MRK) report earnings before the open on Tuesday, May 1.
Pfizer Earnings and Options Activity
When PFE last reported, management reiterated that it continues to review strategic options for its Consumer Healthcare business and said it expects to make a decision sometime during 2018. The company has been mulling a course of action for its consumer division for some time now, and analysts estimate it’d be worth around $20 billion if sold.
There had been reports over the past few months that some of the potential buyers, GlaxoSmithKline (GSK) and Reckitt Benckiser, had withdrawn from bidding on the assets. If PFE doesn’t end up selling the unit outright, it could make the decision to spin-off the unit or keep it entirely.
In recent quarters, PFE’s growth has been driven by its Innovative Health segment as sales have lagged in the Essential Health segment. In Q4 2017, total revenue was up 1% year-over-year to $13.7 billion. Revenue from Innovative Health was up 6% year-over-year to $8.2 billion, while revenue from Essential Health was down 7% year-over-year to $5.5 billion, some of which was a result of the company’s divestiture of Hospira Infusion Systems.
Some of the companies newer drugs (Ibrance, Eliquis and Xeljanz) have been growing at a rapid pace, offsetting slowing/declining sales in drugs that have lost exclusivity. PFE has quite a few drugs in trials, including several cancer treatments, and analysts will likely be looking for some commentary around progress with those trials.
For Q1, PFE is expected to report adjusted EPS of $0.73 on revenue of $13.1 billion, according to third-party consensus estimates. In the same quarter last year, PFE earned $0.69 per share on revenue of $12.8 billion. For all of 2018, management issued guidance for adjusted EPS of $2.90 to $3.00 and revenue between $53.5 billion and $55 billion. According to PFE’s guidance, the company expects to return to revenue growth in 2018 after a 0.5% decline in 2017.
Around the upcoming earnings release, options traders have priced in about a 1.4% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was on the low end at the 36th percentile as of this morning.
In short-term trading at the May 4 weekly expiration, activity for both calls and puts has been concentrated at the 36.5 and 37 strike prices, right at the money for the 37-strikes. At the May 18 monthly expiration, trading has been heavier at the 37-strike call, while trading on the put side has been concentrated at the 35 and 36 puts, right around where the stock was trading from the end of March until mid-April.
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.
Merck Earnings and Options Activity
Keytruda, MRK’s blockbuster cancer drug, has been the company’s largest driver of growth in recent quarters. In Q4 2017, MRK’s total revenue grew 3% year-over-year to $10.4 billion. Keytruda sales were up 169% year-over-year to $1.3 billion, making it the company’s second largest product by revenue behind Januvia, a diabetes drug, which saw flat sales in Q4 at $1.5 billion.
Analysts see Keytruda and Lynparza, the company’s recently approved breast cancer drug co-developed and co-commercialized with AstraZeneca, as two of PFE’s bigger growth drivers in upcoming quarters. MRK has announced a string of positive results from studies related to Keytruda’s treatment of lung cancer in recent months, and analysts will likely be digging in for more info on how that could impact sales in upcoming quarters.
For Q1, MRK is expected to report adjusted EPS of $0.99 on revenue of $10.1 billion, according to third-party consensus estimates. In Q1 2017, the company reported adjusted EPS of $0.88 on revenue of $9.4 billion. MRK has beat earnings estimates in each of the past eight quarters, while revenue has missed estimates in half of them. For all of 2018, MRK said it expects revenue to be between $41.2 billion and $42.7 billion and adjusted EPS in a range of $4.08 to $4.23.
Around the upcoming earnings release, options traders have priced in about a 2.1% stock move in either direction, according to the Market Maker Move indicator. Implied volatility was at the 45th percentile as of this morning, pretty much the middle of the road.
In short-term trading at the May 4 weekly expiration, calls have been active at the 60 strike price, whereas there hasn’t been a whole lot of activity on the put side. Looking further out at the May 18 monthly expiration, there’s been quite a bit of activity at the 60 and 61-strike calls. Trading has been lighter on the put side, with most of the activity concentrated at the 57.5 strike.
What’s Coming Up
Earnings season continues this week and some of the major companies scheduled to report are Apple (AAPL), Tesla (TSLA), Activision Blizzard (ATVI) and Alibaba (BABA). So far, results have been pretty strong this quarter. As of April 27, 53% of the companies in the S&P 500 (SPX) have reported results; 79% have beaten earnings estimates and 74% have beaten revenue estimates, according to FactSet.
At the end of the week, attention will likely be drawn back to economic data with April’s employment report due out Friday morning. If you have time, check out today’s market update for a look at what else is going on across markets.
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