Merck (MRK- Free Merck Stock Report)  a large New Jersey-based drugmaker and Dow-30 component, has reported third-quarter earnings of $0.90 a share, versus $0.92 in the comparable period of 2013. While a year-over-year decline in profit was somewhat expected, due largely to patent losses and increased generic competition, the bottom-line tally managed to exceed our $0.89 expectation as well as consensus ($0.88). The modest beat was driven primarily by increased cost cutting, though offset some by lower-than-expected revenues. Following the release, management narrowed its 2014 full-year earnings guidance from $3.35-$3.53 a share, to $3.46-$3.50. We are maintaining our share-net target at the upper end of this range ($3.50). Despite the seemingly solid showing, Merck stock traded somewhat lower in a weak market this morning.

In the September period, worldwide revenues declined 4% year over year, to $10.6 billion, continuing a downward trend that dates back to the third quarter of 2012. The steady decline over this time can be largely attributed to the August, 2012 patent expiration of SINGULAIR, the company's once-prominent asthma medication. While the brunt of the SINGULAIR impact has been endured (the drug now represents only 2% of the top line), the lingering effects were still felt during the third quarter as its sales plummeted another 22%, to $218 million. Weakness in the ZETIA/VYTORIN (-3%), GARDASIL (-11%), and NASONEX (-12%) franchises also contributed to lagging revenue growth in the recent period, partially offsetting gains in top sellers JANUVIA/JANUMET (+5%) and REMICADE (+5%). Outside the pharmaceutical segment, Merck received a nice boost from its Animal Health business (+11%), but Consumer Care revenues were down 9%. For all of 2014, management is estimating revenues of between $42.4 billion and $42.8 billion, which would represent a decline of roughly 2% versus 2013.

Merck's top-line struggles have been well-documented over the past several years. Much like a few of its big-name rivals (such as Pfizer and AstraZeneca), the weakness has stemmed from blockbuster patent losses and slow-developing pipeline prospects. In Merck's case, we continue to view the long-term story favorably, as we see several potential drivers that could help to turn the tide down the road. The big factor will be the elimination of the SINGULAIR overhang, which has hampered top-line comps dating back to 2012. The majority of SINGULAIR losses are nearly over and done with and the company's new lineup appears poised to drive a rebound. This new lineup will be headed by Merck's current top-selling product JANUVIA/JANUMET, which generated $1.44 billion in sales last quarter (14% of total revenue) and is under patent protection until 2022. The company also maintains a number of attractive late-stage assets that are projected to become meaningful contributors over the 3- to 5-year pull. In the third quarter, Merck won a few more key approvals including KEYTRUDA for the treatment of advanced melanoma and BELSOMRA for patients with insomnia. KEYTRUDA received breakthrough therapy designation from the FDA and will certainly be a prospect to keep an eye on in the year ahead.

All told, our investment thesis for Merck remains unchanged since our last full-page report on October 10th. With generic pressures easing and core franchises performing well, we believe the company is positioned to improve its top and bottom lines out to the 2017-2019 timeframe. While the stock has come down a bit from its 52-week high, it has still enjoyed a nice run in 2014, up roughly 13% in value year to date. At present, Merck holds superior marks for Safety (1) and Financial Strength (A++). The equity's 3%-plus yield provides an above-average income component for dividend-seeking investors, too.

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.