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Dow-30 Earnings: Merck & Co. - Fourth Quarter 2012
Merck (MRK – Free Merck Stock Report), a New Jersey-based drugmaker and Dow-30 component, has posted fourth-quarter results that fell slightly below our expectations. Reported earnings of $0.83 a share came in short of our $0.86 estimate, as higher-than-expected generic erosion on its popular asthma treatment Singulair, largely offset double-digit sales gains in several other core products. Despite the lackluster finish to the year, Merck still managed to top 2011's bottom-line tally. For the full year, the company earned $3.82 a share, versus $3.77 in the comparable year-earlier period. However, Wall Street didn't appear too enthused with the fourth-quarter miss, as shares were down more than 3% in early morning trading.
For the period, worldwide revenues declined 5%, to $11.7 billion, primarily reflecting increased generic pressure stemming from Singulair's patent loss in August. The fallout was greater than we had anticipated, as sales of the drug declined 67% year over year, to $480 million. On a positive note, Merck posted strong gains in several other core franchises including Januvia (+18%), Janumet (+17%), and Gardasil (+61%). We remain optimistic that heightened contributions from these products, coupled with promising upcoming launches, will help to better offset the Singulair shortfall over the longer term.
In 2013, the full-year realization of generic erosion on Singulair will undoubtedly have a significant impact on Merck's performance (at its peak, Singulair accounted for about 11% of total revenues). Although we expect other core products and new launches to help pick up the slack, we believe it will likely take some time for these contributions to fill the substantial void left by Singulair. The recently announced delay of promising pipeline candidate Odanacatib will likely slow this process to a certain degree. The osteoporosis drug was set to debut in 2013, but due to an expanded safety and efficacy study, it is now looking more likely to be released in 2014. All told, we expect both earnings and sales to be materially lower in the year ahead, relative to 2012. Management issued its 2013 earnings guidance range of $3.60-$3.70 a share. For the time being, we are maintaining our full-year estimate at the higher end of this guidance ($3.70).
Looking out to 2015-2017, our investment thesis for Merck & Co. remains largely unchanged. While sales will likely be materially lower in the near term due to patent expirations, we believe new product contributions and continued growth of the existing product base 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.