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.
"That didn't feel right," Frazier said. "It's a large market. 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 early afternoon trading, shares were down $2.57, or 2.9%, at $85.79, 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.
During the quarter, Merck received its 23rd approval for Keytruda in treating different cancer types and patient groups, this time in a type of bladder cancer.
Kenilworth, New Jersey-based Merck's growing veterinary medicines business, which sells Bravecto flea and tick killer and Vetsulin insulin for dogs and cats, had sales of $1.12 billion in the quarter, up 8% from a year earlier.
During the fourth quarter, Merck paid $2.7 billion for ArQule, a company developing treatments for B-cell cancers, and won approval for Ervebo, the first vaccine against the Ebola virus. It's being given to people in Congo to fight the epidemic there.
Merck said the spinoff of women's medicines such as the Nexplanon birth control implant, older drugs including cholesterol treatments Zetia and Vytorin, and three biosimilars, or near-copies of expensive biologic drugs, is expected to be completed in the first half of 2021. It will create a new company, expected to be based in New Jersey, via a tax-free distribution to Merck shareholders.
Merck expects to record $1.5 billion in operating efficiencies by 2024 with the spinoff.
The company forecast adjusted annual net income of $5.62 to $5.77 per share, for all of 2020, and revenue ranging from $48.8 billion to $50.3 billion. Analysts were expecting earnings of $5.64 per share and revenue of $46.4 billion.
For all of 2019, Merck posted net income of $9.84 billion, or $3.81 per share, on revenue of $46.84 billion.