Merck (MRK Free Merck Stock Report), a New Jersey-based drugmaker and Dow-30 component, has reported first-quarter earnings of $0.88 a share, versus $0.85 in the comparable period of 2013. The bottom-line tally handily beat consensus, and our own, expectations of $0.80, as increased cost cutting helped to mitigate the impact of continued generic erosion on several former blockbuster medications. Due to the better-than-expected start to 2014, we have raised our full-year share-net target from $3.40 to $3.50, which is at the higher end of management's $3.35-$3.53 guidance. Shares of Merck traded nicely higher on the release, setting a 52-week and multi-year high in the process.

In the March period, worldwide revenues declined 4% year over year, to $10.3 billion, continuing a trend that dates back to the third quarter of 2012. It is no coincidence that Merck lost patent protection on its former blockbuster asthma medication SINGULAIR in August, 2012, as this has been the primary driver of the top-line decline over this time. While the brunt of the SINGULAIR impact has seemingly been endured (the medication now represents less than 3% of total sales), lingering effects were still felt during the first quarter, as sales of the drug plummeted another 20%, to $271 million. Weakness in the ZETIA/VYTORIN (-5%) and NASONEX (-19%) franchises also contributed to lagging revenues, partially offset by gains in JANUVIA/JANUMET (+3%), REMICADE (+10%), and ISENTRESS (+8%). For full-year 2014, management is guiding for revenues between $42.4 billion and $43.2 billion, reflecting year-over-year declines of roughly 2%-3%.

While Merck has struggled with revenue generation over the past few years, we see several potential drivers that could help to turn the tide in 2014 and beyond. The primary factor will likely be the elimination of the SINGULAIR overhang. As mentioned above, the availability of generic SINGULAIR has been a burden on top-line comps dating back to 2012. However, with the majority of the sales loss now over and done with, we expect comparisons to get significantly easier during the coming quarters. Merck should also get a boost from improved contributions from other core franchises, particularly its top-grosser, JANUVIA/JANUMET, which now accounts for 13% of total sales and is under patent protection until 2022. An attractive late-stage pipeline could provide further upside over the long term.

All told, our investment thesis for Merck remains unchanged since our last full-page report in April. With generic pressures easing and core franchises performing well, we believe the company is in a much more-favorable position to increase its top and bottom lines over the pull to 2017-2019. Indeed, the investment community appears to be sharing these beliefs, as Merck stock is currently trading at its highest levels in more than five years. A present, Merck shares hold a superior mark for Safety (1), and the company garners a Financial Strength rating of A++. Too the equity's yield, which is in the range of 3%, provides an above-average income component for shareholders, 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.