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Dow-30 Earnings: Merck & Co. - Third Quarter 2013
Merck (MRK – Free Merck Stock Report), a New Jersey-based drugmaker and Dow-30 component, reported third-quarter earnings of $0.92 a share, versus $0.95 in the comparable period of 2012. This marks the fourth-consecutive quarter of declining profits for the company as it continues to feel the impact of several big-name patent losses, most notably its former blockbuster asthma treatment, Singulair. Despite ongoing challenges, the bottom-line tally largely exceeded Wall Street's expectations and ours, as consensus estimates had pegged the company to earn around $0.88 a share. Following the release, management narrowed its full-year earnings guidance range from $3.45-$3.55 a share, to $3.48-$3.55 a share. In adherence, we have raised our 2013 share-earnings estimate by a nickel, to $3.50.
For the period, worldwide revenues declined 4% year over year to $11.0 billion, primarily driven by increased generic competition on Singulair. Sales of the once-prominent drug fell 53% in the quarter, from $602 million to $280 million, as consumers, as expected, migrated to cheaper generic versions. Meanwhile, the company's current top-seller Januvia provided little relief. The type 2 diabetes pill had been climbing steadily toward the $4 billion-a-year mark, and was largely responsible for offsetting Singulair losses earlier in the year, but its sales fell 5% to $927 million. Management cited unfavorable currency exchange and wholesalers reducing inventory as reasons for the weakness. That said, solid gains from Gardasil (+15%), Remicade (+17%), and Janumet (+9%) helped to pick up some of the slack.
With revenues heading for a third straight year of decline (recent guidance calls for a 5%-6% drop in 2013), the pressure is mounting for the current management team to devise a plan to turn the tide. While cost-cutting has largely helped to lighten the impact on earnings, there is only so much that can be trimmed from the cost structure. In our view, continued development of new products and the late-stage pipeline will be imperative to ensuring long-term earnings stability. Singulair's $5 billion years are becoming an increasingly distant memory, and it is time for the next generation of therapies to step up and take the reins.
All told, our investment thesis for Merck remains largely unchanged since our October report. While patent expirations are likely to pressure results in the near term, we believe new product contributions and continued growth of existing franchises 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 (A++) garners our highest grade. Its near 4% yield ranks favorably to the pharmaceutical industry average, 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.