Merck (MRK - Free Merck Stock Report), the second-largest drugmaker in the United States, has reported solid fourth-quarter earnings of $0.97 a share, surpassing our estimate of $0.94. Sales during the period fell just short of our expectation, but lower acquisition and restructuring charges helped pick up the slack and drive the bottom-line outperformance. There was little reaction on Wall Street, and Merck shares moved modestly lower in a generally weaker drugmaking group.

Total quarterly revenue increased 1.7%, year over year, to $12.3 billion, as double-digit sales gains for Januvia, Janumet, Isentress, and Gardasil helped to offset declines in Remicade (-28%) and Vytorin (-16%). Sales of the company's top-selling product, Singulair, continued to exhibit strong growth, rising 8%, to $1.46 billion.

In our view, the key focus for the year ahead will be the quickly approaching patent expiration of Singulair, which is scheduled for later this year. The company is still feeling the effects of generic competition for its blood pressure drugs Cozaar/Hyzaar, and the loss of Singulair is expected to add significant pressure. To wit, management indicated that adjusted share earnings in 2012 would likely come in between $3.75 and $3.85, which is marginally higher than the $3.77 the company earned in the year just ended. Consequently, we have trimmed a dime from our 2012 earnings estimate, which now stands at $3.80 a share.

On the bright side, Merck has been one of the few drug companies to maintain an investment in its pipeline during the most recent recession and the slow, uneven recovery that followed. This investment should help mitigate some of the longer-term effects of patent expiration, as new products are developed and transformed into meaningful top-line components. Indeed, management plans to file five major drugs for approval between 2012 and 2013.

Looking down the road, we have become increasingly encouraged with Merck's business development plans and the health of its pipeline. While patent expirations will likely play a factor in the near term, we believe new product contributions and continued growth of its existing product base should be enough to ensure long-term stability. At present, Merck stock holds a superior Safety rank (1), and the company's Financial Strength score is excellent. Conservative income-oriented investors may find appeal in the stock's above-average dividend yield and well-covered payment.

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.