Merck (MRKFree Merck Stock Report), a leading manufacturer of pharmaceuticals, has reported first-quarter earnings of $0.92 a share, which were just a few pennies more than our $0.88 estimate and about 11% higher than the year-earlier figure. The good results can be attributed, to a large extent, to the pharmaceuticals division, which enjoyed healthy sales of such products as Januvia, Janumet, Isentress, and Singulair. What's more, the animal health unit was aided by solid demand for cattle, swine, and aquaculture products, while profits for the consumer care business were boosted by a strong performance from key brands, including Claritin and Coppertone. Finally, cost-containment measures across all areas of the company helped, to a certain extent. Assuming that generally favorable trends hold, earnings per share for this year, as a whole, may well climb 8%, to $3.70. Additional expansion of operating margins ought to enable the bottom line to rise almost 5%, to $3.85 a share, in 2012.

We are constructive about Merck's prospects over the 2014-2016 horizon. Upcoming patent expirations ought to draw the attention of generic drug manufacturers, thus crimping results. Even so, the acquisition of Schering-Plough, which closed in late 2009, boosts the company's growth possibilities nicely. (Pretax cost savings from the consolidation are estimated to be roughly $3.5 billion annually, to be fully realized by 2012.) Another plus is the balance sheet, boasting more than $10 billion in cash and a manageable level of both short- and long-term debt. Lastly, results should continue to benefit nicely from partnerships. In fact, the company recently established a joint venture with Sun Pharmaceutical Industries (based in India), to develop branded generics for the emerging markets.

These high-quality shares strengthened a bit in price following the release of the company's good second-quarter financial results. Furthermore, they offer good recovery potential over the 3- to 5-year period, as supported by our sales and earnings projections.

About The Company: Merck & Co., Inc., is a leading manufacturer of human and animal health care and specialty chemical products. Important product names include Singulair (asthma); Vytorin, Zocor (cholesterol-lowering agents); Fosamax (osteoporosis); Crixivan (HIV/AIDS); Vasotec, Prinivil (angiotensin converting enzyme (ACE) inhibitors for high blood pressure and angina); and Prilosec (gastro.). The company acquired Medco in November of 1993 and spun it off again in August of 2003. It acquired Schering-Plough in 2009.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.