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Merck (MRKFree Merck Stock Report), a New Jersey-based drugmaker and Dow-30 component, reported second-quarter earnings of $0.84 a share, versus $1.05 in the comparable period of 2012. The year-over-year decline in profits was to be expected, as the company continues to struggle with patent expirations on several key drugs including its former blockbuster asthma treatment, Singulair. All told, results were relatively in line with our expectations and we are leaving our full-year earnings target unchanged at $3.45 a share. Management reaffirmed its 2013 guidance of $3.45-$3.55 a share. However, Wall Street seemed dissatisfied with the announcement as shares of Merck slipped about 1% in early trading.

For the period, worldwide revenues fell 11% year over year to $11.0 billion, primarily driven by increased generic competition on the company's once top-grossing product Singulair. Sales of the drug plummeted 80% in the quarter from $1.4 billion to $280 million. Though substantial, the dropoff was pretty much in line with what we had anticipated, as consumers continued to vie for the cheaper generic versions. What came as somewhat of a disappointment was the struggles of core franchises Januvia, Zetia, and Remicade. Indeed, these products have been highly relied upon to pick up the slack for Singulair in recent quarters, but sales barely budged in the June period further adding to Merck's top-line woes.

With revenues heading for a third straight year of declining growth, the pressure is mounting for the current management team to devise a plan to turn the tide. While cost-cutting has helped to lighten the impact on earnings of late, there is only so much that can be trimmed from the cost structure. In our view, the continued development of new products and the late-stage pipeline will be imperative to ensuring long-term earnings stability. A keen focus on emerging markets appears to be one avenue the company is taking, particularly in China. Sales from emerging markets increased 7% in the second quarter and accounted for approximately 22% of total pharmaceutical revenues, with China being the key focal point (sales up 13%).

All told, our investment thesis for Merck remains largely unchanged since our July 12th report. While patent expirations are likely to pressure operating 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. 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.