Merck & Co.'s (MRK) earnings per share (excluding special items) for the second quarter of 2011 came in at 95 cents, in line the Zacks Consensus Estimate but 10.5% above the year-ago earnings. Double-digit growth of key products and new product launches contributed to earnings growth.
Revenues for the quarter increased 7% to $12.2 billion, above the Zacks Consensus Estimate of $11.8 billion. While revenues were favorably impacted by foreign exchange fluctuations (4%), products like Januvia, Janumet, Singulair, Isentress, Gardasil, Zostavax and Remicade contributed strongly to sales. The strong performance of these products was partially offset by lower sales of Vytorin and Cozaar and Hyzaar.
Results by Product
Singulair, indicated for the chronic treatment of asthma and relief of symptoms of allergic rhinitis, recorded $1.4 billion in sales, up 8% from the year-ago period. The product performed well in the US and Japan.
Meanwhile, Remicade sales increased 26% to $842 million. Merck settled its dispute with Johnson & Johnson (JNJ) regarding the distribution rights for Remicade and Simponi. This has removed a significant overhang from the stock. Merck intends to focus on improving penetration rates and drive growth in Europe, Russia and Turkey. Simponi sales came in at $75 million.
Cardiovascular franchise sales, primarily consisting of Vytorin, Zetia and Integrilin declined 1.7% to $1.1 billion. Merck is currently seeking FDA approval for Vytorin and Zetia to be used in combination with simvastatin for the prevention of major cardiovascular events in patients with chronic kidney disease.
Isentress, the company’s product for HIV infection, recorded an increase of 26% to $337 million during the reported quarter. Growth was driven by demand in the US and Europe. Isentress’ label was expanded in both Europe and the US in 2009 to include its use as a combination therapy for previously untreated patients. This should help drive sales. PegIntron sales, indicated for treating hepatitis C, came in at $154 million, down 17%.
Sales of Merck’s antihypertensive medicines, Cozaar and Hyzaar, continued to decline during the second quarter. Sales came in at $406 million, down 16%. The decline was expected as these drugs lost marketing exclusivity in the US and major European markets in 2010. We expect sales to continue declining going forward. Temodar sales ($234 million, down 14%) also declined due to generic competition in Europe.
The diabetes franchise, consisting of Januvia and Janumet, continued to perform well. Combined sales increased 35% to $1.1 billion. While Januvia sales increased 30% to $779 million, Janumet sales increased 47% to $321 million. Merck is working on increasing sales of its diabetes franchise by gaining approval for additional indications.
The company is looking to gain approval for an extended-release formulation of Janumet for type II diabetes. However, Merck received a complete response letter from the FDA regarding the label expansion. The letter relates to the resolution of pre-approval inspection issues – the company is responding to the questions raised by the agency.
Gardasil, Merck’s cervical cancer vaccine, posted sales of $277 million, up 27% year over year. Zostavax sales came in at $122 million with performance being driven by the filling of a major number of backorders. Merck expects the backorder situation to continue until it has sufficient inventory levels to meet demand.
Meanwhile, Merck’s ProQuad, MMR II and Varivax vaccines recorded combined sales of $291 million, down 14%.
Merck provided an update on its recently approved hepatitis C treatment, Victrelis (boceprevir). The company said that the US launch of the product is currently ongoing. Merck has signed an agreement with Roche (RHHBY) for the global marketing of Victrelis as part of a triple combination therapy.
Merck’s animal health segment posted sales of $802 million, up 10%. Increased sales of new products in cattle, companion animal and poultry helped drive growth.
Consumer Care sales declined 1% to $541 million in the second quarter of 2011, mainly due to lower sales of Claritin given the weak allergy season. This was partially offset by increases in suncare.
Guidance
With the release of second quarter results, Merck updated some components of its guidance. The company now expects adjusted earnings in the range of $3.68 – $3.76 in 2011 (old guidance: $3.66 – $3.76). While the company reduced the top end of its R&D guidance to $8.0 billion – $8.3 billion (old guidance: $8.0 billion – $8.4 billion), revenue guidance was maintained.
Merck expects 2011 revenue to grow in the low to mid single-digit percentage range year over year. The Zacks Consensus Estimate currently stands at $3.74 per share.
More Job Cuts Planned
Merck continues to work on reducing its cost structure and announced the next phase of its merger restructuring program. The company intends to reduce its workforce (as of Dec 31, 2009) by another 12-13% by the end of 2015. Merck, however, has plans to hire new employees for strategic areas like emerging markets.
Merck now expects to achieve annual ongoing savings of $4 billion – $4.6 billion from its restructuring program instead of the original target of $2.7 billion – $3.1 billion. The company remains on track to achieve $3.5 billion per annum in cost synergies by the end of 2012.
Neutral on Merck
We currently have a Neutral recommendation on Merck, which carries a Zacks #3 Rank (short-term Hold rating). While Merck is facing headwinds in the form of patent expirations of key drugs, EU pricing pressure, US health care reform, and pipeline setbacks, some of the company’s recent launches should start contributing significantly to the top line in the forthcoming quarters. The recent approval of Victrelis is a major boost for the company. Moreover, the Remicade/Simponi settlement has removed a major overhang from the shares.
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