Merck Beats, Raises Outlook

Merck’s (MRK - Analyst Report) earnings for the third quarter came in at 90 cents per share, which was ahead of the Zacks Consensus Estimate of 82 cents, driven by continued growth of its key products and strict cost management. The company reported revenues of $6 billion, up 2% from the same period in 2008. Revenue would have higher, but for the unfavorable foreign exchange movement, which affected global sales by 3%.

Weaker-than-expected sales of Gardasil were offset by significantly stronger-than-anticipated Singulair revenues. Although the US Food and Drug Administration (FDA) asked for additional precautions regarding the risks associated with the use of Merck’s lead product Singulair (as well as other leukotriene inhibitors), including suicide and depression, the drug recorded an increase of 5% compared to the third quarter of 2008.

Gardasil, Merck’s cervical cancer vaccine, recorded yet another quarter of lower sales. The company recorded $311 million in sales of the vaccine, down 22% from the year-ago period. Recently, the vaccine received FDA approval to be used in boys and young men in the age group of 9-26 years for the prevention of genital warts. However, sales are likely to be hampered as the FDA approval of GlaxoSmithKline’s (GSK - Analyst Report) cervical cancer vaccine, Cervarix, will intensify competition further.

Cholesterol franchise sales, consisting of Vytorin and Zetia under Merck’s partnership with Schering Plough (SGP), continued to decline in the reported quarter as well. While sales were down 7% year over year in the third quarter, in the second quarter, they were down 10%. Isentress, the company’s product for HIV infection recorded an increase of 84% to $197 million during the quarter. The drug is expected to record increased sales with the recent FDA and EU approval for the drug’s use in previously untreated patients as well.

Merck’s antihypertensive medicines, Cozaar and Hyzaar, recorded a 3% decline of sales during the quarter. Sales from these two drugs are going to decline significantly going forward as they will lose market exclusivity in the US and some of the major European markets during the first half of 2010.

The diabetes franchise, consisting of Januvia and Janumet, recorded a robust performance during the quarter compared to the year ago period. While Januvia sales grew 30% to $491 million, Janumet recorded sales of $173 million, an increase of 72%. Going forward, we expect Januvia to record higher sales as the drug received approval in Japan recently for the treatment of type-2 diabetes.

Based on the strong third quarter results, management raised their full-year earnings guidance to $3.20 - $3.30 per share. The full-year revenue guidance of $23.2 - $23.7 billion was reaffirmed. Guidance excludes any contribution from the proposed merger with Schering-Plough. The company continues to expect the merger to close in the fourth quarter of this year. We have a Neutral recommendation on the stock.

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