Following the release of first quarter 2011 results on April 29, 2011, there have been significant revisions to the annual estimates for Merck & Co., Inc. (MRK) for 2011 and 2012 by a majority of the analysts covering the global research-driven pharmaceutical products company.
First Quarter Highlights
Merck’s adjusted earnings per share for the first quarter of 2011 came in at $0.92, well above the Zacks Consensus Estimate of $0.84 and the year-ago earnings of $0.83. Double-digit growth of key products and cost control boosted earnings.
Revenues for the quarter increased 1.4% to $11.6 billion, just above the Zacks Consensus Estimate of $11.2 billion. Strong performance of products like Januvia, Janumet, Singulair, Isentress, Nasonex and Remicade was offset by lower sales of Cozaar and Hyzaar.
(Read our full coverage of the earnings report at: Merck Tops on Lower Costs )
Agreement of Estimate Revisions
There is a significant positive bias in the estimate revisions for 2011 over the last 30 days. Over the last 30 days, 10 of the 19 analysts following the stock have upped their earnings estimates for 2011 with 2 analysts moved in the opposite direction.
Following the impressive performance in the first quarter of 2011, driven primarily by the double-digit growth of key products and the cost control efforts of the company, Merck increased the lower end of its earnings guidance for 2011.
In 2011, the company expects to earn in the range of $3.66-$3.76 per share (on an adjusted basis) as opposed to the old guidance range of $3.64 – $3.76. Apart from announcing the financial results, Merck also announced a $5 billion share buyback program. Including the existing program, Merck can buy back shares worth $6.4 billion. This should help boost the bottom line.
We believe most analysts covering the stock have raised the 2011 earnings estimate encouraged by the company’s guidance, cost control efforts and the share buyback program.
Moreover, the efforts made by the company to combat the loss of revenues due to the impending genericization of its key drugs are also encouraging. To combat the generic threat, Merck is looking to expand via acquisitions. The purchase of Inspire Pharmaceuticals Inc. is a step in that direction. With the acquisition, Merck gains access to AzaSite, which is approved for bacterial conjunctivitis. AzaSite revenues increased 22% to $42.7 million in 2010. AzaSite is also being developed for blepharitis.
The acquisition makes Merck eligible to receive co-promotion revenues/royalties on two other eye care products, Elestat and Restasis, from Allergan, Inc. (AGN). Additional royalties will come from Santen Pharma on Diquas sales in Japan.
Moreover, the recent approval of chronic hepatitis C virus (HCV) drug, Victrelis (boceprevir) by the US Food and Drug Administration (FDA) has further boosted Merck’s portfolio. (Read our full coverage of the event at: FDA Approval for Merck's Victrelis ).
For 2012, 9 of the 16 analysts (covering the stock for 2012) have upped their estimates with 4 moving in the opposite direction.
Magnitude of Revisions
Estimate for 2011 has gone up by $0.03 over the last 30 days. The current Zacks Consensus Estimate of $3.72 is within the guidance range of $3.66 – $3.76 per share. 2012 estimate has been up by $0.01 to $3.84 over the last 30 days following movements in both directions.
Neutral on Merck
We currently have a ‘Neutral’ recommendation on Merck in the long-run. Merck currently carries a Zacks #3 Rank (‘Hold’ rating) in the short-run. Merck is currently facing issues such as patent expirations of key drugs, EU pricing pressure, US health care reform and pipeline setbacks. We believe the company will resort to cost-cutting initiatives to drive the bottom line. Meanwhile, some of the company’s recent launches should start contributing significantly to the top line in the forthcoming quarters.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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