Merck Beats but Guides Lower - Analyst Blog

Merck & Co.'s (MRK) earnings per share (excluding  certain special items) for the fourth quarter of 2010 came in at 88 cents, 5 cents above the Zacks Consensus Estimate and 9 cents above the year-ago earnings. However, including adjustments, the company suffered a loss of 17 cents, well below the year-ago earnings of $2.35.

Revenues for the quarter climbed 20% to $12.1 billion, above the Zacks Consensus Estimate of $11.5 billion. Reported quarter revenues include revenues from Schering-Plough products following Merck's merger with Schering-Plough in November 2009. Products like Januvia, Janumet, Singulair, Isentress and Remicade performed well during the quarter.

Results by Product

Gardasil, Merck's cervical cancer vaccine, posted sales of $221 million, down 20% year over year. The decline is primarily attributable to a government purchase for the Strategic National Stockpile in the year-ago quarter.

Zostavax sales climbed 40.8% to $107 million in the final quarter of 2010. The rise was attributable to significant backorder fulfillment in the reported quarter. However, management at Merck believes that performance of the product will be affected by supply constraints, going forward. Meanwhile, Merck's ProQuad, MMR II and Varivax vaccines recorded combined sales of $285 million, down 14%.

Singulair, indicated for the treatment of asthma and relief of symptoms of allergic rhinitis, recorded $1.3 billion in sales, up 7% from the year-ago period. Meanwhile, Remicade sales increased 12% to $710 million.

Cardiovascular franchise sales, primarily consisting of Vytorin and Zetia, were flat at approximately $1.2 billion. Isentress, the company's product for HIV infection, recorded an increase of 34% to $313 million during the reported quarter.

Isentress' label was expanded in both Europe and the US in 2009 to include its use as a combination therapy for previously untreated patients. As a result, we expect the drug to record increased sales in the forthcoming period. Pegintron sales, indicated for treating hepatitis C, came in at $198 million in the final quarter of 2010.

As expected, sales of Merck's antihypertensive medicines, Cozaar and Hyzaar, continued to decline during the third quarter. Sales came in at $415 million, down 57%. The decline was expected as these drugs lost market exclusivity in the US and in major European markets in 2010. We expect sales to continue declining going forward.

The diabetes franchise, consisting of Januvia and Janumet, continued to perform well. While Januvia sales grew 21% to $675 million, Janumet recorded sales of $288 million, an increase of 42%.

For the full year 2010, Merck earned (excluding special items) $3.42, up 5%. Earnings for the year surpassed the Zacks Consensus Estimate by 5 cents. Revenues for the year came in flat at $46 billion.

Guidance 

Apart from disclosing financial results, Merck also provided guidance for 2011. The company expects adjusted earnings in the range of $3.64 and $3.76 in 2011.

The Zacks Consensus estimate for 2011 is $3.81. Merck, which expects 2011 revenue to grow in the range of low to mid-single digit percentage year over year, withdrew its long-term adjusted earnings forecast of high single-digit growth till 2013. 

Merck, which expects to retain full rights to Remicade and Simponi, is confident of achieving its previously announced target of $3.5 billion in annual savings by the end of 2012.

Neutral on Merck

We currently have a Neutral recommendation on Merck, which is supported by a Zacks #3 Rank (short-term Hold rating). Merck is facing issues like patent expirations of key drugs and European pricing pressure.

However, the company has a deep pipeline which should act as a cushion when its key products lose patent expiry in the next few years. Moreover, some of the company's recent launches should start contributing significantly to the top line in the forthcoming quarters. Besides, the restructuring initiatives undertaken by the company should also improve its bottom line.