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Merck Beats on Q3 Earnings, Misses Revs

Zacks Equity Research

Merck & Co. (MRK) reported third quarter 2013 earnings of 92 cents per share, beating the Zacks Consensus Estimate of 88 cents. Earnings, however, declined 3.2% from the year-ago period.

Revenues for the quarter declined 4% to $11,032 million, missing the Zacks Consensus Estimate of $11,111 million. Revenues were hit by the genericization of Singulair and a few other products and negative currency fluctuation (2%).

Including one-time items, third quarter 2013 earnings declined 32.1% to 38 cents per share.

The Quarter in Details

Merck’s Pharmaceutical segment posted revenues of $9.5 billion, down 4%. Negative currency movement impacted Pharmaceutical segment revenues by 2%.

Products like Janumet, Simponi, Isentress, Remicade and Gardasil performed well. However, the strong performance of these products was offset by lower revenues of Singulair, Januvia, Cozaar/Hyzaar, Temodar, Vytorin, and Maxalt.

Singulair revenues experienced a severe decline following its U.S. patent expiry in Aug 2012 and loss of exclusivity in the EU in Feb 2013. Revenues fell 53% from the year-ago period to $280 million. The drug retains exclusivity in Japan until 2016.

Meanwhile, Remicade and Simponi combined revenues increased 22% to $700 million. Performance was most likely boosted by Simponi’s launch in France and the reintroduction of the auto injector in Germany. Meanwhile, approval for an additional indication in ulcerative colitis could drive sales further.

Isentress, the company’s product for HIV infection, recorded revenues of $427 million, up 7%, in the reported quarter mainly due to growth across all regions.

The diabetes franchise, consisting of Januvia and Janumet, witnessed a 1% decline in revenues which came in at $1.4 billion. Lower sales in the U.S. due to reduced customer inventory levels and negative currency movement in Japan affected revenues despite growth in Europe and emerging markets.

Revenues reflected a 3% negative impact due to currency movement. While Januvia revenues decreased 5% to $927 million, Janumet revenues grew 9% to $442 million. Merck is working on penetrating the sulfonylurea class. One of the factors adversely impacting revenues could be Increased rebate and pricing pressure as competitors are working on improving their formulary positions by increasing discounts.

Gardasil, Merck’s cervical cancer vaccine, recorded revenues of $665 million, up 15% year over year. Revenues were driven by increased vaccination of males in the U.S and higher public sector sales ($60 million). However, sales were lower in Japan, where the government suspended the proactive recommendation of HPV vaccines.

This decision could continue to have a significant negative impact on Gardasil sales for the rest of the year in Japan. Gardasil sales in Japan were $140 million in 2012. Meanwhile, the Minister of Health in Brazil announced a national immunization program with Gardasil slated to begin in 2014.

Merck’s ProQuad, MMR II and Varivax vaccines recorded combined revenues of $421 million, up 6%. Vytorin revenues declined 6% to $396 million during the quarter.

Merck’s hepatitis C treatment, Victrelis posted revenues of $121 million, down 19% from the year-ago period. Revenues were affected by contraction in several markets due to warehousing and a large number of clinical trials.

Emerging markets accounted for 20% of pharmaceutical revenues in the third quarter of 2013 – sales declined 4% during the quarter mainly due to declines in China and Mexico despite strong growth in Brazil, Korea, Russia and Turkey.

Merck’s animal health segment posted revenues of $800 million, down 2%. Although companion animal and swine products recorded growth, this was offset by negative currency movement (2%) and the voluntary suspension of Zilmax (feed supplement for cattle) in the U.S. and Canada.

Consumer Care revenues declined 2% to $443 million in the third quarter of 2013. Revenues were affected by negative currency movement (2%) and lower sales in the Dr. Scholl’s footcare line – this was partially offset by the launch of Oxytrol for Women (treatment of overactive bladder).

Marketing and administrative expenses declined 6.7% to $2.8 billion in the third quarter of 2013 due to productivity measures undertaken by the company. R&D spend decreased 10.5% to $1.7 billion in the third quarter of 2013.

Merck is working on cutting down annual operating costs by about $2.5 billion by the end of 2015.

2013 Earnings Guidance Narrowed

Merck narrowed its 2013 earnings guidance to $3.48 - $3.52 per share. Earlier, the company was expecting earnings in the range of $3.45 and $3.55 per share. The Zacks Consensus Estimate of $3.48 per share is at the lower end of the new guidance range. Revenues are expected to decline 5% - 6% from 2012 levels. Merck expects R&D spend to decline from 2012 levels. The company spent $7.9 billion on R&D in 2012.

Our Take

Merck’s third quarter results were mixed with the company beating on earning and missing on revenues. We were disappointed with the decline in Januvia sales, which is concerning.

With Singulair and a few other products facing generic competition, we expect the top- and bottom-line to remain under pressure. Other headwinds remain in the form of unfavorable currency movement and pipeline setbacks. The company will look towards cost-cutting initiatives and share buybacks to drive the bottom-line.

Merck currently carries a Zacks Rank #3 (Hold). Companies that currently look well-positioned include Roche (RHHBY), Bayer (BAYRY) and Johnson and Johnson (JNJ). While Roche is a Zacks Rank #1 (Strong Buy) stock, Bayer and Johnson and Johnson are Zacks Rank #2 (Buy) stocks.

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