Merck & Co.’s (MRK) earnings per share for the second quarter of 2010 came in at 86 cents, 4 cents above the Zacks Consensus Estimate and 3.6% above the year-ago earnings of 83 cents. However, including adjustments, the company reported earnings of 24 cents, well below the year-ago earnings of 74 cents.
Merck reported revenues of $11.35 billion, missing the Zacks Consensus Estimate of $11.5 billion. The US healthcare reform impacted revenues by $44 million in the reported quarter. Revenues in the year-ago period were $5.9 billion. Reported quarter revenues include revenues from Schering-Plough products following Merck’s merger with Schering-Plough on Nov 3, 2009.
Results by Product
Gardasil, Merck’s cervical cancer vaccine, recorded yet another quarter of lower sales. For the reported quarter, Gardasil’s sales came in at $219 million, down 18% year over year. Sales have struggled recently due to the difficulty in penetrating older patients. However, Merck’s ProQuad, MMR II and Varivax vaccines recorded 5% growth with combined sales coming in at $340 million.
Singulair, indicated for the treatment asthma and relief of symptoms of allergic rhinitis, recorded $1.3 billion in sales, flat from the year-ago period. Meanwhile, Remicade sales increased 18% to $669 million.
Cardiovascular franchise sales, primarily consisting of Vytorin and Zetia, came in at $1.1 billion.
Isentress, the company’s product for HIV infection, recorded an increase of 55% to $267 million during the reported quarter. Isentress’ label was expanded in both Europe and the US in 2009 to include its use as a combination therapy for previously untreated patients. As a result, we expect the drug to record increased sales in the forthcoming period.
As expected, Merck’s antihypertensive medicines, Cozaar and Hyzaar, recorded a 46% decline in sales to $485 million during the quarter. The decline was expected as these drugs lost market exclusivity in the US in April and in major European markets during the first quarter.
The diabetes franchise, consisting of Januvia and Janumet, continued to perform well. While Januvia sales grew 30% to $600 million, Janumet recorded sales of $218 million, an increase of 41%.
Merck updated its guidance for 2010 and now expects earnings in the range of $3.29 – $3.39 per share on revenues of $45.4 – $46.1 billion. The company earlier guided earnings of $3.27 – $3.41 on revenues of $45.4 – $46.4 billion. The Zacks Consensus Estimate currently stands at $3.37.
The US healthcare reform is expected to hit Merck’s 2010 revenues by $170 million including the first half 2010 impact of $76 million.
Merck expects to retain full rights to Remicade and Simponi. Johnson & Johnson (JNJ) had discovered Remicade and Simponi (golimumab) and had licensed ex-US rights to Schering-Plough (now a part of Merck).
However, Johnson & Johnson believes that Merck’s merger with Schering-Plough has triggered a change-of-control provision in the agreement allowing Johnson & Johnson to reclaim full rights to both drugs. A hearing in the arbitration process is scheduled to commence in September 2010.
We also note that Merck is still on target to achieve a high single-digit growth rate in adjusted EPS for the period of 2009-2013. Following the completion of its merger with Schering-Plough in November 2009, Merck is confident of achieving its previously announced target of $3.5 billion in annual savings in 2012.
Neutral on Merck
We currently have a Neutral recommendation on Merck, which is supported by a Zacks #3 Rank (Hold). Merck is currently facing issues such as patent expirations of key drugs, recent pipeline failures and softer sales of Gardasil. However, the company has a deep pipeline which should act as a cushion when its key products lose patent expiry in the next few years. Moreover, some of the company’s recent launches should start contributing significantly to the top line in the forthcoming quarters. Besides, the restructuring initiatives undertaken by the company should also improve its bottom line.