Merck & Co.
) reported third quarter 2012 earnings per share (excluding
special items) of 95 cents, a couple of cents above the Zacks
Consensus Estimate and 1.1% above the year-ago earnings.
Revenues for the quarter fell 4.4% to $11,488 million, missing
the Zacks Consensus Estimate of $11,672 million. Revenues were
hit by the patent expiry of Singulair (indicated for the chronic
treatment of asthma and relief of symptoms of allergic rhinitis)
and negative currency fluctuation.
Despite the decline in revenues, net income benefited from
cost control and a lower tax rate. Including one-time items,
earnings increased 1.8% to 56 cents per share.
The Quarter in Details
Merck's Pharmaceutical segment posted sales of $9.9 billion,
down 5%. Negative currency movement impacted Pharmaceutical
segment sales by 5%. Products like Januvia, Janumet, Zostavax,
Isentress, Victrelis and Gardasil contributed to sales.
However, the strong performance of these products was
partially offset by lower sales of Singulair, Vytorin and
Cozaar/Hyzaar. Remicade sales continued to decline during the
quarter, most likely being impacted by austerity measures.
Singulair sales experienced a severe decline following its US
patent expiry in August 2012. Sales fell 55% from the year-ago
period to $602 million. We note that Singulair will retain
exclusivity in the EU until February 2013 and in Japan until
Meanwhile, with Merck transferring exclusive marketing rights
for Remicade and Simponi to
Johnson & Johnson
), Remicade and Simponi combined sales fell 9% to $576 million.
We expect Merck to focus on improving penetration rates and drive
growth in Europe, Russia and Turkey. Merck is looking to expand
Simponi's label and is seeking EU approval for ulcerative colitis
which is a fast growing anti-TNF category.
Isentress, the company's product for HIV infection, recorded
an increase of 16% to $399 million during the reported quarter.
Performance was driven by strong growth in the US and emerging
The diabetes franchise, consisting of Januvia and Janumet,
continued to perform well, and witnessed growth in the US and
Japan. Combined sales increased 15% to $1.4 billion. While
Januvia sales increased 15% to $975 million, Janumet sales
increased 16% to $405 million.
Merck is working on increasing sales of its diabetes franchise
by gaining approval for additional indications.
Gardasil, Merck's cervical cancer vaccine, recorded sales of
$581 million, up 31% year over year. Sales were driven by
increased vaccination of males in the US and strong performance
in emerging markets.
Zostavax sales came in at $202 million, up 87%. Merck
initiated a TV advertising campaign in April to increase
awareness about the risk of shingles. The company also launched a
new branded print and online campaign.
Meanwhile, Merck's ProQuad, MMR II and Varivax vaccines
recorded combined sales of $396 million, up 1%. Vytorin sales
declined 10% to $423 million during the quarter.
Merck's hepatitis C treatment, Victrelis (boceprevir) posted
sales of $149 million, up from $126 million, $111 million, and
$87 million reported in the last three quarters. We were
encouraged to see the sequential improvement in Victrelis
Victrelis was added to the VA formulary, which is the largest
single provider of services to hepatitis C patients in the US.
This represents a significant commercial opportunity for
Merck has an agreement with
) for the global marketing of Victrelis as part of a triple
Emerging markets accounted for 20% of pharmaceutical sales in
the third quarter of 2012 with China continuing to put in a
Merck's animal health segment posted sales of $815 million,
down 1%. Results were affected by unfavorable currency
Consumer Care sales increased 7% to $451 million in the third
quarter of 2012, mainly due to Dr. Scholl's and Coppertone.
Marketing and administrative expenses declined 9.1% to $3.0
billion in the third quarter of 2012 due to productivity measures
undertaken by the company and currency impact. R&D spend
remained flat at $1.9 billion in the third quarter of 2012.
2012 Guidance Narrowed
Merck tightened its outlook for 2012 and now expects adjusted
earnings in the range of $3.78 - $3.82 per share. Earlier, the
company was expecting adjusted earnings in the range of $3.75 -
$3.85 per share. Revenues are expected to remain flat or close to
2011 levels. The company expects full year revenues to be
negatively impacted by more than 2% at current exchange rates.
The Zacks Consensus Estimate currently stands at $3.81 per share,
towards the higher end of the revised guidance range.
Currency could cut fourth quarter sales by 1% at current
rates. Merck expects R&D spend to increase from 2011. The
company spent $7.7 billion on R&D in 2011. The company's
late-stage pipeline is advancing with several regulatory filings
expected by late 2013. These include odanacatib (once-weekly oral
treatment of osteoporosis), suvorexant (insomnia) and Tredaptive
(multiple lipid parameters).
We currently have a Neutral recommendation on Merck, which
carries a Zacks #3 Rank (short-term 'Hold' rating). Merck has
entered a challenging period with erstwhile blockbuster drug,
Singulair, losing exclusivity in the US in early August 2012. We
were encouraged to see Merck beat earnings expectations despite
the significant decline in Singulair sales. New products and the
diabetes franchise helped soften the impact of the genericization
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