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Merck & Co. (MRK - Analyst Report) reported fourth quarter 2013 earnings of 88 cents per share, a penny short of the Zacks Consensus Estimate. Earnings, however, grew 6% from the year-ago period.

Revenues for the quarter declined 3.6% to $11,319 million, missing the Zacks Consensus Estimate of $11,351 million. Revenues were hit by the genericization of Singulair and a few other products and negative currency fluctuation (3%).

Including one-time items, fourth quarter 2013 earnings declined 13.3% to 26 cents per share.

Full-year earnings declined 8.6% to $3.49 per share, a penny below the Zacks Consensus Estimate. Revenues declined 6.8% to $44,033 million, just shy of the Zacks Consensus Estimate of $44,062 million.

The Quarter in Details

Merck’s Pharmaceutical segment posted revenues of $9.8 billion, down 3%. Negative currency movement impacted Pharmaceutical segment revenues by 3%.

Products like Janumet, Simponi, Isentress, Remicade and Zostavax performed well. However, the strong performance of these products was offset by lower revenues of Singulair, Januvia, Cozaar/Hyzaar, Temodar 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 38% from the year-ago period to $298 million. The drug retains exclusivity in Japan until 2016.

Meanwhile, Remicade and Simponi combined revenues increased 19% to $766 million. Performance was boosted by Simponi’s launch in additional countries. Approval for an additional indication in ulcerative colitis could drive sales further.

Isentress, the company’s product for HIV infection, recorded revenues of $442 million, up 16%, in the reported quarter mainly due to growth across all regions.

The diabetes franchise, consisting of Januvia and Janumet, witnessed 2% growth in revenues which came in at $1.6 billion.

While Januvia revenues decreased 1% to $1.1 billion, Janumet revenues grew 11% to $503 million. Merck is working on penetrating the sulfonylurea class. One of the factors adversely impacting revenues could be increased rebate and pricing pressure as competitors are working on improving their formulary positions by increasing discounts.

Gardasil, Merck’s cervical cancer vaccine, recorded revenues of $394 million, down 11% year over year. Revenues were affected by lower sales in the U.S resulting from the timing of public sector purchases, negative currency movement (2%) and lower sales in Japan, where the government suspended the proactive recommendation of HPV vaccines.

This decision could continue to have a significant negative impact on Gardasil sales in Japan. Meanwhile, the Minister of Health in Brazil announced a national immunization program with Gardasil slated to begin in 2014.

Merck’s ProQuad, MMR II and Varivax vaccines recorded combined revenues of $273 million, down 11%. Vytorin revenues remained flat at $436 million during the quarter.

Merck’s hepatitis C treatment, Victrelis posted revenues of $81 million, down 29.6% from the year-ago period. Revenues were affected by contraction in several markets due to warehousing and a large number of clinical trials. Revenues will decline further given the entry of a new product in the market – Sovaldi.

Emerging markets accounted for 21% of pharmaceutical revenues in the fourth quarter of 2013 – sales grew 2% during the quarter despite a 6% negative impact resulting from currency movement.

Merck’s animal health segment posted revenues of $871 million, down 3%. Although poultry and aqua products recorded growth, this was offset by negative currency movement (2%), lower sales of ruminant products and the voluntary suspension of Zilmax (feed supplement for cattle) in the U.S. and Canada.

Consumer Care revenues declined 1% to $390 million in the fourth quarter of 2013. Revenues were affected by negative currency movement (2%).

Marketing and administrative expenses declined 12.6% to $2.8 billion in the fourth quarter of 2013 due to productivity measures undertaken by the company. R&D spend decreased 20% to $1.8 billion in the fourth quarter of 2013.

Merck is working on cutting down annual operating costs by about $2.5 billion by the end of 2015.

2014 Guidance

Merck expects to earn $3.35 - $3.53 per share on revenues of $42.4 billion - $43.2 billion. The Zacks Consensus Estimate of $3.50 per share is towards the higher end of the guidance range. As far as the revenue guidance is concerned, it is below the Zacks Consensus Estimate of $43.3 billion.

Merck expects R&D as well as marketing and administrative spend to decline from 2013 levels. The company spent $7.1 billion and $11.7 billion on R&D and marketing and administrative matters, respectively, in 2013.

Announces Collaborations

Along with reporting fourth quarter results, Merck said that it is collaborating with Amgen (AMGN - Analyst Report), Incyte and Pfizer (PFE - Analyst Report) separately for the evaluation of different combination regimens with MK-3475. MK-3475 is Merck’s investigational anti-PD-1 immunotherapy being evaluated for different types of cancer. The company expects to finish submitting a rolling regulatory application for MK-3475 in patients with advanced melanoma in the first half of 2014.

Our Take

Merck’s fourth quarter results, which were just shy of expectations, were affected by generic competition and negative currency movement. Januvia sales, while up on a sequential basis, declined from the year-ago period. 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. The company will look towards cost-cutting initiatives and share buybacks to drive the bottom-line.

Merck currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Allergan (AGN - Analyst Report), which is a Zacks Rank #2 (Buy) stock.

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