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Merck (MRKFree Merck Stock Report), a New Jersey-based drugmaker and Dow-30 component, reported first-quarter earnings of $0.85 a share, versus $0.99 in the comparable period of 2012. The year-over-year decline in profits was somewhat expected, as the company deals with patent expirations on several key drugs including its former blockbuster asthma treatment, Singulair. In fact, quarterly earnings-per-share actually exceeded our expectations by a nickel. While the bottom-line outperformance was encouraging, a reduced outlook for 2013 was not, as management cut its full-year earnings guidance from $3.60-$3.70 a share, to $3.45-$3.55 a share, reflecting increased generic erosion forecasts. Although the company also announced a massive $15 billion share repurchase program, it was not enough to sway sentiment on Wall Street as shares of Merck fell nearly 5% in early morning trading.

For the period, worldwide revenues declined 9% to $10.7 billion, primarily driven by increased generic competition on the company's once top-grossing product Singulair. Sales of the drug plunged 75% in the quarter from $1.3 billion to $337 million. Besides Singulair, lackluster performance in several other core franchises also contributed to the weak showing including Januvia (-4%), and Vytorin (-11%). Softness in the pharmaceuticals segment was partially offset by a 2% increase in Animal Health sales and a 3% gain in Consumer care products. Emerging market growth was also solid as sales increased 6%, helped by strong demand in China. 

In the coming years, it has become increasingly apparent that continued development of new products and the late-stage pipeline will be essential in ensuring long-term earnings stability. With limited contributions expected from Singulair in 2013, and Januvia showing signs of deceleration, management will look to upcoming prospects including Suvorexant, Bridion, and Odanacatib to help pick up the slack. Suvorexant and Bridion are expected to be launched in 2013, while delays in Odanacatib have pushed its scheduled release date back to 2014.

Despite the reduced 2013 outlook, our investment thesis for Merck remains largely unchanged since our mid-April report. While patent expirations will likely take a toll on performance in the coming years, 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. 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.