Merck expects a flat tax rate in 2018 as peers see benefit from reform

Merck executives praised the U.S. government for tax reform on Friday, but the drugmaker is projecting a flat tax rate this year as many of its peers expect a benefit.

The New Jersey drug giant is projecting a 19% to 20% tax rate in 2018, compared to 17% for Pfizer, 18% for Lilly, 16.5% to 18% for Johnson & Johnson and 9% for AbbVie. In 2017, Merck's tax rate was 19.1%, the company reported with its 2017 results.

On the company's conference call Friday, executives explained that while Merck is expecting a similar tax rate in 2018, last year was particularly low due to tax planning and one-time benefits. The company posted a 22% tax rate in 2016, which they said makes for a better comparison. In the long run, tax reform should benefit Merck by "a few points," they said.

At $10.4 billion, Merck's fourth-quarter sales came in 1% below consensus, according to a Friday note from Jefferies analyst Jeffrey Holford. For the year, the company posted total sales of $40.1 billion, helped by a 172% increase in Keytruda sales to $3.8 billion. It took a $5 billion charge to repatriate foreign cash.

So what will Merck do with its newly accessible cash? The drugmaker plans to "invest in sustainable long-term value creating opportunities," announcing $12 billion in spending in capital projects over the next 5 years; $8 billion in spending is slated for the U.S. The drugmaker also donated to the Merck Foundation and plans to provide a bonus to eligible staffers in the second quarter of 2018.

In an update to last year's cyberattack, Merck disclosed that the hack cost $125 million in the fourth quarter and $260 million for the year in lost sales.

In Europe, where Merck markets Johnson & Johnson's Remicade, sales for the blockbuster immunology drug crashed 31% as biosimilars continue to steal share. The J&J drug has stood up to biosim competition in the U.S., resulting in a closely watched lawsuit from rival Pfizer.

Checkpoint inhibitor Keytruda continued its impressive climb last year, generating $3.8 billion in sales. Revenues for the star cancer drug surpassed analyst expectations by $27 million in the fourth quarter.

Shingles vaccine Zostavax, under pressure from GlaxoSmithKline's new Shingrix, tanked in the U.S., with its sales falling 45% to $121 million in the fourth quarter. Last year, a CDC advisory panel voted to recommend Shingrix over Zostavax and Merck executives said Friday they expect "very strong" pressure to their vaccine going forward.

Looking ahead, Merck is expecting sales of $41.2 billion to $42.7 billion for 2018. The guidance came in 2% above consensus estimates at the midpoint, Holford wrote.

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