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Merck Beats by a Penny; Affirms View

Zacks Equity Research

Merck & Co. (MRK) reported first quarter 2012 earnings per share (excluding special items) of 99 cents, a penny above the Zacks Consensus Estimate and 7.6% above the year-ago earnings.

Revenues for the quarter increased 1.3% to $11,731 million, just shy of the Zacks Consensus Estimate of $11,746 million. While currency fluctuations negatively impacted sales by 1%, the arbitration settlement agreement with Johnson & Johnson (JNJ) had a negative impact of 2% on sales.

The Quarter in Details

Merck’s Pharmaceutical segment posted sales of $10.1 billion, up 3%. Products like Januvia, Janumet, Isentress, Victrelis and Gardasil contributed to sales. However, the strong performance of these products was partially offset by lower sales of Vytorin and Cozaar/Hyzaar. Remicade sales continued to decline during the quarter, most likely being impacted by austerity measures.

Singulair, indicated for the chronic treatment of asthma and relief of symptoms of allergic rhinitis, recorded $1.3 billion in sales, up 1% from the year-ago period. However, Singulair sales will experience a severe decline following its US patent expiry in August 2012. We note that Singulair will retain exclusivity in the EU until February 2013 and in Japan until 2016.

Meanwhile, with Merck transferring exclusive marketing rights for Remicade and Simponi to Johnson & Johnson, Remicade and Simponi combined sales fell 26%. We expect Merck to focus on improving penetration rates and drive growth in Europe, Russia and Turkey.

Isentress, the company’s product for HIV infection, recorded an increase of 15% to $337 million during the reported quarter. Performance was driven by strong growth in the US.

The diabetes franchise, consisting of Januvia and Janumet, continued to perform well, and witnessed growth across all regions. Combined sales increased 26% to $1.3 billion. While Januvia sales increased 24% to $919 million, Janumet sales increased 29% to $392 million. Merck is working on increasing sales of its diabetes franchise by gaining approval for additional indications. The diabetes franchise should benefit from the recent approval of Juvisync, which is a combination of Januvia and Zocor.

Gardasil, Merck’s cervical cancer vaccine, recorded sales of $284 million, up 33% year over year. Sales were driven by increased vaccination of males aged 9-26 years and the launch in Japan. Zostavax sales came in at $76 million with performance being driven by an improvement in the supply situation. Merck has initiated a TV advertising campaign in April to increase awareness about the risk of shingles.

Meanwhile, Merck’s ProQuad, MMR II and Varivax vaccines recorded combined sales of $255 million, up 4%. Vytorin sales fell 8% to $444 million during the quarter.

Merck provided an update on its recently approved hepatitis C treatment, Victrelis (boceprevir). Sales increased to $111 million, up from $87 million, $31 million and $21 million reported in the fourth, third and second quarters of 2011, respectively. We were encouraged to see the sequential improvement in Victrelis sales. Victrelis was launched recently in Mexico and Brazil.

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 Victrelis.

Merck has an agreement with Roche (RHHBY) for the global marketing of Victrelis as part of a triple combination therapy. However, Victrelis’ sales continue to be significantly lower than Vertex Pharma’s (VRTX) Incivek’s sales which came in at $357 million in the first quarter of 2012.

Emerging markets accounted for 17% of pharmaceutical sales in the first quarter of 2012 with China continuing to put in a strong performance.

Merck’s animal health segment posted sales of $821 million, up 8%. Increased sales of companion animal and cattle products helped drive growth.

Consumer Care sales increased 7% to $554 million in the first quarter of 2012, mainly due to Coppertone and the Dr. Scholl’s footcare line.

Marketing and administrative expenses declined 2.7% to $3.0 billion in the first quarter of 2012 due to productivity measures undertaken by the company. R&D spend remained flat at $1.8 billion in the first quarter of 2012.

2012 Guidance Maintained

Merck reaffirmed its outlook for 2012. The company expects adjusted earnings in the range of $3.75 - $3.85 per share. The Zacks Consensus Estimate currently stands at $3.80 per share.

Revenues are expected to remain flat or close to 2011 levels. The company expects revenues to be negatively impacted by 2-3% at current exchange rates. First half performance will be better than the second half, which will be impacted by the loss of exclusivity on Singulair with the fourth quarter being the weakest.

Merck expects R&D spend to remain at similar levels as in 2011. The company spent $7.7 billion on R&D in 2011. The company’s late-stage pipeline is advancing with five regulatory filings expected in 2012 and 2013. These include Bridion (a neuromuscular reversal agent), V503 (an investigational vaccine to help protect against certain HPV associated cancers), odanacatib (once-weekly oral treatment of osteoporosis), Tredaptive (atherosclerosis) and suvorexant (insomnia). Merck intends to file for US approval of suvorexant in 2012.

Neutral on Merck

We currently have a Neutral recommendation on Merck, which carries a Zacks #3 Rank (short-term ‘Hold’ rating). While headwinds remain in the form of the Singulair patent expiration, EU pricing pressure, US health care reform, the Remicade/Simponi transition and pipeline setbacks, some of the company’s recent launches should start contributing significantly to the top line in the forthcoming quarters.

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