Pharmaceuticals giant and Dow-30 component Merck (MRK - Free Merck Stock Report) has reported strong June-quarter results. The company earned $0.95 a share in the term, surpassing our estimate of $0.91 and up over 10% from the comparable period of 2010. Performance was driven primarily by solid gains in the pharmaceuticals segment, where several key products experienced high single- to double-digit growth. For 2011, management raised the lower end of its earnings guidance range from $3.66 a share, to $3.68. In all, Merck now estimates share net to be in the range of $3.68 to $3.76.

Worldwide sales reached $12.2 billion in the second quarter, versus $11.4 billion in the prior-year period. The solid 7% year-over-year gain can be attributed to continued growth of top-selling product Singulair and the fast-growing diabetes franchise. Sales of Singulair grew 8%, to $1.4 billion, while sales of the combined diabetes franchise of Januvia and Janumet rose 35%, to $1.1 billion. The company continues to anticipate top-line growth in the low- to mid-single digits in 2011.

Elsewhere, management announced plans to slash costs, which would likely include workforce reductions of 12%-13% by 2015. Merck also intends to continue its restructuring plan, with the goal to save as much as $4.6 billion annually. Furthermore, the company lowered its R&D expense target for 2011 to a range of $8.0 billion-$8.3 billion.

Although costs are being cut, the company still expects to invest substantially in emerging markets during the course of the year in order to offset the loss of patent exclusivity on Singulair, which is scheduled to expire in 2012. Sales of Singulair remain the company's key top-line component, comprising 13% of pharmaceutical sales in the second quarter. Management will be relying considerably on successful product launches to help fill the void. One encouraging development is the company's new hepatitis C drug Victrelis, which gained both U.S. FDA and European approvals during the June quarter. Another promising product in the pipeline is Merck's cholesterol treatment, which was recently submitted for review.

Despite meeting Wall Street's expectations, shares of Merck were down as much as 2% in early morning trading. Nonetheless, this remains a high-quality holding (Safety: 1) that ought to appeal to conservative investors seeking income, owing to the stock's above-average dividend yield (4.3%). Moreover, these shares have decent long-term price recovery and total-return potential on a risk-adjusted basis.

About The Company: Merck & Co., Inc., is a leading manufacturer of human and animal health care 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.