Merck & Co. (MRK Free Merck Stock Report), a New Jersey-based drugmaker and Dow-30 component, has posted third-quarter results that exceeded our expectations. Reported earnings of $0.95 a share came in ahead of our $0.92 estimate, as significant reductions to overhead costs helped offset lower sales stemming from new generic competition for its blockbuster drug, SINGULAIR. Following the modest quarterly outperformance, management narrowed its full-year earnings guidance range from $3.75-$3.85 a share to $3.78-$3.82. As a result, we have reduced our 2012 share-net target by a nickel, to $3.80, largely reflecting a lower revenue outlook for the balance of the year. Investors seemed relatively unfazed by the earnings announcement, as shares of Merck were up less than 1% in early morning trading.

For the period, worldwide revenues declined 4%, to $11.5 billion, primarily reflecting the loss of exclusivity on its top-selling product, SINGULAIR, which went off patent in August. While some top-line deterioration was expected because of this, the fallout was slightly greater than we had anticipated, as sales of the drug plummeted 55%, to $602 million. Even still, Merck posted some impressive growth in other core products, including double-digit sales gains for JANUVIA (15%), JANUMET (16%), GARDASIL (31%), and ISENTRESS (16%). We are optimistic that heightened contributions from these products, coupled with promising upcoming launches, will help to lighten the SINGULAIR impact over the longer term.

Despite lower top-line results, management did a solid job of executing cost-cutting initiatives during the period to help offset the impact on earnings. Reduced spending on production, marketing, and research, coupled with lower taxes, largely helped to keep profits intact. In the coming quarters, we expect Merck to maintain a prudent cost strategy, allotting time for the further development of its existing core product line and the emergence of upcoming launches. The company's top pipeline candidates, ODANACITIB and SUVOREXANT, have shown promise in recent trials and should be key contributors down the road.

Looking out to 2015-2017, our investment thesis for Merck & Co. remains largely unchanged. While sales will likely be materially lower in the near term due to patent expirations, we believe new product contributions and continued growth of the existing products base should be enough to reinforce stability over the long term. At present, Merck stock holds a superior Safety rank (1), and the company's Financial Strength (at A++) garners our highest grade. An above-average dividend yield offers a nice income-component, as well.

About The Company: Merck & Co. is a leading manufacturer of human and animal healthcare 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.