) announced its quarterly earnings for Q4 2012 last
Friday, where it reported an expected decline in revenues. The drug
maker recorded $11.7 billion in sales, down 5% year-over-year.
Singulair's patent expiry was the major factor impacting overall
pharmaceutical growth whereas growth in consumer healthcare and
animal franchise remained strong. The strengthening of the U.S.
dollar also weighed on revenues. Net income (excluding
non-recurring items) declined by 15% to $2.5 billion.
We are updating
our $49 price estimate for Merck,
to reflect the earnings and recent developments.
Check out our complete analysis of Merck
Patent Cliff Hurts Revenues
Overall pharmaceutical revenues declined by 3%, excluding the
currency impact. The growth in the Pharmaceutical division was
largely hurt by the loss of U.S. patent exclusivity of Singulair in
August. The drug has seen an accelerating decline in prescriptions
since then as cheap generic versions continue to replace it has
declined over 60% to near $500 million from $1.5 billion in Q4
Of the other major drugs, Vyotrin, a combination of Merck's own
Zocor and Zetia to prevent cardiovascular events, also weighed on
growth as U.S. prescriptions declined due to concerns around its
efficacy. While the drug has proven to be effective in lowering
cholesterol, there is little statistically significant evidence
that it reduces chances of heart attacks, strokes and other
cardiovascular problems and may not add major benefits to statins
like Pfizer's (
) Lipitor, a conventional treatment for reducing cholesterol.
However, the key point that came out of earnings call is that data
monitoring committee has requested interim analysis data of
IMPROVE-IT, a large study that is being conducted to prove efficacy
of Vyotrin, and any positive outcome there will put it on growth
trajectory before June 2013, the current expected deadline of the
With double digit growth, mainly due to their expansion to new
indications and a continued uptake in their demand, Januvia,
Janumet and Gardasil were amongst the major growth drivers for the
pharmaceuticals division. In February, Janumet, a once-daily
treatment to control blood sugar, got the
FDA approval for use in type 2 diabetes
. Gardasil benefited from continued strong uptake in males while
public sector purchasing, especially from emerging markets, also
fueled growth. A decline in Istentress, due to weak sales in
international market owing to timings of tenders, surprised us even
as sales grew in the U.S. following FDA's approval for use in
children older than 2 years for HIV therapy in January 2012.
As expected, Japan grew by an impressive 9% growth despite price
cuts in 2012. Strong volume growth of Januvia, Gardasil and Zetia
more than offset the pricing pressure in the country. Sales from
emerging markets grew 8% and accounted for nearly 20% of total
pharmaceutical sales in the Q4 2012 with China leading the
The animal health business, part of Legacy Pharma, Animal &
Cons. Health division in our model, grew by healthy 6% y-o-y,
excluding a 3% negative impact on foreign exchange. Sales
were strong, particularly in the U.S. and Asia Pacific, on cattle
and poultry products. Sales from consumer care also grew by robust
9% due to higher sales of certain OTC drugs. However, lower
revenues of 23% from AstraZeneca LP as well as lower third-party
manufacturing sales offset much of the growth in Legacy Pharma,
Animal & Cons. Health division.
Gross Margins Decline
On the operational front, while gross profit margins declined
due to change in product mix, we saw a reduction in marketing and
administrative costs as well as R&D expenditures following
management's cost cutting efforts.
What To Look Forward To In 2013?
Merck's 2013 earnings are expected to decline on account of lost
sales due to the patent expiry for Singulair. Further, Temodar and
Propecia, which collectively bring around $1 billion in sales, are
set to see generic competition from 2013. Further, gross margins
are also under pressure though we think this is already factored in
Merck's share price and progress on new drugs will drive the stock
price going forward.
Concerns have been raised as Merck decided to delay its
blockbuster potential drug Odanacatib by 2014 and this could weigh
on the stock in short term. However, the drug maker announced its
plans for additional filings, including V503, a vaccine that
targets certain HPV-associated cancers. In addition, it will seek
approval for two allergy immunotherapy products, one for grass
allergies and the other for ragweed allergies during 2013.
The drug maker is already awaiting FDA approval for Suvorexant
and is confident of receiving the same in next few months. Further,
after getting delayed in 2012, Atorvastatin/Ezetimibe combo should
also receive approval during 2013. Any positive news here will
drive the stock price of the company.
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