Merck & Co. (MRK) reported first quarter 2014 earnings of 88 cents per share, well above the Zacks Consensus Estimate of 79 cents. Earnings grew 3.5% from the year-ago period.
Revenues for the quarter declined 3.8% to $10,264 million, missing the Zacks Consensus Estimate of $10,448 million. Revenues were hit by the genericization of Singulair and a few other products and negative currency fluctuation (2%).
Including one-time items, first quarter 2014 earnings grew 9.6% to 57 cents per share.
The Quarter in Detail
Merck’s Pharmaceutical segment posted revenues of $8.5 billion, down 5%. Negative currency movement impacted Pharmaceutical segment revenues by 2%.
Products like Janumet, Simponi, Isentress and Remicade performed well. However, the strong performance of these products was offset by lower revenues of Singulair, Nasonex, Cozaar/Hyzaar, Temodar, Januvia and Zostavax.
Singulair revenues continued to experience a severe decline following its U.S. patent expiry in Aug 2012 and loss of exclusivity in the EU in Feb 2013. Revenues fell 20% from the year-ago period to $271 million. The drug retains exclusivity in Japan until 2016.
Meanwhile, Remicade and Simponi combined revenues increased 16% to $760 million with some help from currency (3%). Performance was boosted by Simponi’s launch in additional countries and continued growth in existing markets. Approval for an additional indication in ulcerative colitis could drive sales further.
Isentress, the company’s product for HIV infection, recorded revenues of $390 million, up 8%, in the reported quarter mainly due to strong growth in Europe and emerging markets.
The diabetes franchise, consisting of Januvia and Janumet, witnessed 3% growth in revenues which came in at $1.3 billion. Higher sales in the U.S., Europe and emerging markets were partially offset by weakness in Japan and a negative currency impact of 2%.
While Januvia revenues decreased 3% to $858 million, Janumet revenues grew 16% to $476 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 $383 million, down 2% year over year. Revenues were affected by negative currency movement (4%) and lower sales 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 in Japan.
Meanwhile, Gardasil recorded higher sales in the U.S. and benefited from a national immunization program in Brazil.
Merck’s ProQuad, MMR II and Varivax vaccines recorded combined revenues of $280 million, up 4%. Vytorin revenues declined 8% to $361 million during the quarter.
Merck’s hepatitis C treatment, Victrelis posted revenues of $59 million, down 46% from the year-ago period. Revenues were affected by the entry of Gilead’s (GILD) Sovaldi as well as contraction in several markets due to warehousing and a large number of clinical trials.
Merck’s animal health segment posted revenues of $813 million, down 3%. Although poultry, swine and aqua products recorded growth, this was offset by the voluntary suspension of Zilmax (feed supplement for cattle) in the U.S. and Canada.
Consumer Care revenues declined 4% to $546 million in the first quarter of 2014. Revenues were affected by negative currency movement (1%), product divestitures and a shortened allergy season in North America.
Marketing and administrative expenses declined 9.6% to $2.7 billion in the first quarter of 2014 due to productivity measures undertaken by the company. R&D spend decreased 18.2% to $1.5 billion in the first quarter of 2014.
Merck is working on cutting down annual operating costs by about $2.5 billion by the end of 2015.
2014 Guidance Maintained
Merck expects to earn $3.35 – $3.53 per share on revenues of $42.4 billion – $43.2 billion. The Zacks Consensus Estimate of earnings of $3.47 per share and revenues of $42.9 billion is within the guidance range.
Merck expects R&D as well as marketing and administrative spend to decline from 2013 levels. The company spent $7.1 billion and $11.7 billion on R&D and marketing and administrative matters, respectively, in 2013.
Our Take
Merck’s first quarter results were mixed with the company beating on earnings but missing on revenues. Although revenues declined, cost control efforts helped the company beat on the bottom line.
We remain concerned about the performance of Januvia, which declined from the year-ago period. With Singulair and a few other products facing generic competition, we expect the top-line to remain under pressure.
Other headwinds remain in the form of unfavorable currency movement and pipeline setbacks. The company will continue to look towards cost-cutting initiatives and share buybacks to drive the bottom-line.
Merck is a Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the health care sector include Gilead, Johnson & Johnson (JNJ) and Allergan (AGN). While Gilead is a Zacks Rank #1 (Strong Buy) stock, Johnson & Johnson and Allergan are Zacks Rank #2 (Buy) stocks.
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