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Merck, (MRK - Free Merck Stock Report)  a New Jersey-based drugmaker and Dow-30 component, has reported fourth-quarter earnings of $0.88 a share, versus $0.83 in the comparable period of 2012. The EPS tally was in line with consensus estimates calling for $0.89, and marked the company's first year-over-year profit gain since the third quarter of 2012. All in all, it was a positive ending to a challenging year for Merck, which was hurt by increased generic competition on several key franchises, most notably SINGULAIR. For full-year 2013, the company posted earnings of $3.49 a share, versus $3.82 in 2012. Following the release, shares of Merck edged up 2% in a generally weak morning trading session, establishing a new 52-week high in the process.

In the fourth quarter, worldwide revenues declined 4% year over year, to $11.3 billion, largely driven by continued generic erosion on SINGULAIR. Sales of the once-prominent asthma medication fell 38% during the period as consumers continued to flock to cheaper generic versions. Soft demand for other key products including JANUVIA (-1%) and GARDASIL (-11%), added further pressure to the top line. This was partially offset by gains in REMICADE (+13%), JANUMET (+11%), and ISENTRESS (+16%).

While it has certainly been a difficult couple of years for Merck in terms of top-line performance, we see several potential drivers that could signal greener pastures for the drugmaker in 2014. With the brunt of the SINGULAIR impact now in the rear view mirror (now represents only 3% of total sales), and other core franchises gaining momentum, sales comps should become easier in the coming quarters. Although revenues are still projected to be materially lower in 2014 versus 2013, we expect to see a significant deceleration in top-line erosion during the course of the year. Separately, the company has several exciting late-stage pipeline candidates that could become more meaningful contributors down the road. In its recent press release, management indicated it plans to test its closely followed immuno-oncology drug MK-3475 in combination with medicines being developed by Pfizer, Amgen, and Incyte. If approved, analysts believe the drug could generate annual sales in the billions, and greatly improve treatment of melanoma and potentially other cancers.

All told, our investment thesis for Merck remains unchanged since our January 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. Indeed, the investment community appears to be sharing in these beliefs as Merck is currently trading at its highest levels in more than five years. At present, Merck stock holds a superior Safety rank (1), and the company's Financial Strength (A++) garners our Highest grade. Its 3.3% 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.