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Merck Beats Earnings Estimates Through Cost Cutting

Merck Beats Earnings Estimates Through Cost Cutting
By: Bill Ashton
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Merck & Co., Inc. (MRK) reported its financial results for the first quarter of fiscal year 2014 (1QFY14). The pharma giant beat earnings estimates but fell short on revenues, and the stock opened in the green for trading today. As of midday, it is up more than 3.2%.

The company was successfully able to beat earnings estimates for the quarter due to the cost cutting it has implemented in R&D and product marketing. Revenues fell short of expectations though. Non-GAAP EPS was $0.88, excluding special items, nine cents higher than estimates. Merck reported revenues of $10.3 billion during the quarter, which were 4% lower year-over-year (YoY). Revenues fell because of declining sales from Singulair, which lost its patent exclusivity in 2012, and because of the negative impact of foreign currency rates.

Segment Performance

The New Jersey-based company’s largest segment, Pharmaceuticals, saw a 4% YoY decline in revenues to $8.5 billion due to the continued negative impact of patent expirations for Temodar, Singulair, Cozaar/Hyzaar, and Nasonex. Strong performances from the diabetes franchise Januvia/Janumet, which was up 3%, along with the double-digit growth in its arthritis drug, Remicade, slightly offset the declines.

Vaccine sales were weak during the quarter as Gardasil sales were down 2% compared to the year-earlier period. The figure included a 4% negative impact of foreign currency rates. Japanese sales of the product were down due to a government ban placed on the administration of human papillomavirus vaccines.

The Animal Health segment also underperformed as its revenues dropped 3% to $813 million. The weak performance was caused by the suspension of Zilmax in North America. Discounting Zilmax from the segment’s revenues, the performance of Animal Health was up 5% YoY. The segment recorded modest performance and Merck is looking to spin-off the business, or add to its portfolio, as the segment is not large enough to compete in the global animal health market.

Consumer Care, which is up for sale to the highest bidder, brought in $546 million in revenues during the quarter, a 4% YoY decline. The company divested from certain products in the segment while the allergy season in North America was shorter, leading to lower Claritin sales.

Pipeline and Developments

Merck has been struggling to develop a blockbuster drug since the expiration of Singulair, but its pipeline has two promising products that could fetch revenues comparable to those when Singulair sales were at their peak. The pharma giant’s oral combination treatment for chronic Hepatitis C virus (HCV) MK-5172/MK-8742 had sustained viral response (SVR) in a phase 2 trial for patients who have never been treated for HCV, or are hard-to-cure patients. The product, when it becomes available in the market, will become a strong competitor for the market leading HCV drug of Gilead Sciences (GILD) called Sovaldi.

Additionally, during the quarter, Merck received approval from the Food and Drug Administration (FDA) for two allergy immunotherapy tablets. The FDA also accepted Merck’s Biologics License Application for V503, which is an HPV vaccine candidate.

Merck & Co. Guidance

For fiscal 2014, Merck reiterated its earnings per share expectations of $3.35-3.53, the midpoint of which is more or less in line with analyst expectations of $3.45. In its estimate, the company did not account for the ongoing restructuring costs, potential gains from a joint venture program with AstraZeneca plc (ADR) (AZN), and costs related to acquisitions.

As for revenues, Merck expects to generate $42.4-43.2 billion, slightly short of analysts’ expectations of $42.95 billion.

The pharmaceutical company is also working on selling its Consumer Care business, with the current bid for the business close to $14 billion. Top bidders include Reckitt Benckiser (RBGLY) and Bayer AG (BAYRY), which are two large players in the global consumer care market. Merck’s portfolio can potentially add significant value to Reckitt’s and Bayer’s product lines with the addition of Claritin and Coppertone, the leading products of Merck Consumer Care.

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