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Merck & Co. (MRK - Analyst Report) reported second quarter 2013 earnings of 84 cents per share, a couple of cents above the Zacks Consensus Estimate of 82 cents. Earnings, however, declined 20% from the year-ago period.

Revenues for the quarter fell 10.6% to $11,010 million, missing the Zacks Consensus Estimate of $11,221 million. Revenues were hit by the genericization of Singulair and a few other products and negative currency fluctuation.

Including one-time items, second quarter 2013 earnings declined 48.3% to 30 cents per share.

The Quarter in Details

Merck’s Pharmaceutical segment posted revenues of $9.3 billion, down 12%. Negative currency movement impacted Pharmaceutical segment revenues by 3%.

Products like Januvia/Janumet, Simponi, Isentress, and Gardasil performed well. However, the strong performance of these products was offset by lower revenues of Singulair, Cozaar/Hyzaar, Clarinex and Maxalt.

Singulair revenues experienced a severe decline following its U.S. patent expiry in Aug 2012 and loss of exclusivity in the EU in Feb 2013. Revenues fell 80% from the year-ago period to $281 million. The drug retains exclusivity in Japan until 2016.

Meanwhile, Remicade and Simponi combined revenues increased 9% to $647 million. We expect Merck to focus on improving penetration rates and drive growth in Europe, Russia and Turkey. Revenues benefited from Simponi’s growth in Europe.

Isentress, the company’s product for HIV infection, recorded revenues of $412 million, up 4%, in the reported quarter mainly due to strong growth in Europe and the U.S.

The diabetes franchise, consisting of Januvia and Janumet, witnessed 5% growth in revenues which came in at $1.5 billion. Revenues reflected a 5% negative impact of currency movement. While Januvia revenues increased 1% to $1.1 billion, Janumet revenues grew 16% to $474 million. Merck is working on penetrating the sulfonylurea class.

Gardasil, Merck’s cervical cancer vaccine, recorded revenues of $383 million, up 18% year over year. Revenues were driven by increased vaccination of males in the U.S and tenders in Latin America.

Meanwhile, Merck’s ProQuad, MMR II and Varivax vaccines recorded combined revenues of $339 million, up 7%. Vytorin revenues declined 6% to $417 million during the quarter.

Merck’s hepatitis C treatment, Victrelis posted revenues of $116 million, down 8% from the year-ago period. Revenues were affected by contraction in several markets due to warehousing and a large number of clinical trials.

Emerging markets accounted for 22% of pharmaceutical revenues in the second quarter of 2013 with China continuing to put in a strong performance.

Merck’s animal health segment posted revenues of $851 million, down 2%. Although companion animal products and poultry recorded growth, this was offset by lower swine product revenues and negative currency movement.

Consumer Care revenues fell 11% to $490 million in the second quarter of 2013. Results were affected by the ongoing termination of certain Consumer Care distribution arrangements in China and the reversal of sales made to those distributors plus associated termination costs.

Marketing and administrative expenses declined 3.1% to $3.1 billion in the second quarter of 2013 due to productivity measures undertaken by the company. R&D spend decreased 5% to $1.9 billion in the second quarter of 2013.

2013 Guidance

Merck maintained its adjusted earnings outlook for 2013. Merck expects adjusted earnings in the range of $3.45 and $3.55 per share. The current Zacks Consensus Estimate of $3.48 per share is within the guidance range.

Revenues are now expected to decline 5% - 6% instead of 3% - 4% from 2012 levels. Merck now expects R&D spend to decline from 2012 levels instead of increasing slightly. The company spent $7.9 billion on R&D in 2012.

Merck currently carries a Zacks Rank #3 (Hold). With Singulair and a few other products facing generic competition, we expect the top- and bottom-line to remain under pressure. Other headwinds remain in the form of unfavorable currency movement, and pipeline setbacks. We believe the company will look towards cost-cutting initiatives and share buybacks to drive the bottom-line.

Companies that currently look well-positioned include Johnson & Johnson (JNJ - Analyst Report), Actelion Ltd. (ALIOF) and Amgen (AMGN - Analyst Report). While Johnson & Johnson and Amgen are Zacks Rank #2 (Buy) stocks, Actelion is a Zacks Rank #1 (Strong Buy) stock.

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