Earnings Preview: Merck & Co.

Merck & Co. Inc. (MRK - Analyst Report) is set to announce its second quarter 2012 results on July 27, 2012, before the opening bell. The Zacks Consensus Estimate for the second quarter is $1.01 per share, 6.3% above the year-ago earnings of 95 cents.

First Quarter Recap

Merck reported first quarter 2012 earnings per share (excluding special items) of 99 cents, a penny above the Zacks Consensus Estimate and 7.6% above year-ago earnings.

Revenues for the quarter increased 1.3% to $11,731 million, just shy of the Zacks Consensus Estimate of $11,746 million. While currency fluctuations negatively impacted sales by 1%, the arbitration settlement agreement with Johnson & Johnson (JNJ - Analyst Report) had a negative impact of 2% on sales.

(Read our detailed discussion on the first quarter earnings report at: Merck Beats by a Penny; Affirms View).

Agreement of Estimate Revisions

Over the past 30 days, there have been significant estimate revisions for the second quarter of 2012. While 4 analysts have upped their estimates, 5 have moved in the opposite direction.

In contrast, fiscal 2012 estimates have witnessed a strong upward bias over the last 30 days with 9 analysts raising estimates and 1 trimming the same.

Fiscal 2013 earnings estimates have been upped by 12 analysts over the last 30 days with 2 downward movements.

The last 7 days saw 1 analyst slashing earnings estimates for the second quarter of 2012, while 1 moved in the opposite direction. For fiscal 2012, a sole analyst trimmed the estimates.

We believe that concerns regarding the upcoming Singulair patent expiry (August 2012) has led analysts to revise their estimates downward for the second quarter of 2012. Singulair, indicated for the chronic treatment of asthma and relief of symptoms of allergic rhinitis, recorded $5.5 billion in sales in 2011. The product accounted for approximately 11.4% of total revenues in 2011.

Meanwhile, the upward revisions in 2012 estimates reflect the impact of the amendment of Merck’s agreement with AstraZeneca (AZN - Analyst Report). As per the amended agreement, AstraZeneca will not exercise its option to repurchase Merck’s interests in Prilosec and Nexium in the US in 2012.

Merck had expected that AstraZeneca would exercise its option in 2012. Therefore, the amendment of the deal is a positive for Merck and is expected to add approximately $200 million to Merck’s revenues and approximately 3 – 5 cents per share to its 2012 earnings.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the second quarter of 2012 decreased a penny to $1.01 per share in the last 30 days. The Zacks Consensus Estimate for 2012 went up by a cent to $3.83 per share in the past 30 days, which is towards the higher end of the earnings guidance range of $3.75 – $3.85 per share provided by the company. Both second quarter and fiscal 2012 estimates remained stationary in the last 7 days.

Surprise History

Merck has surpassed earnings estimates in three of the last four quarters and reported in-line with expectations in the second quarter of 2011. The company recorded a maximum positive surprise of 3.30% in the third quarter of 2011. On an average, the earnings surprise was 2.49 %.

Our Recommendation

We currently have a Neutral recommendation on Merck, which carries a Zacks #2 Rank (short-term Buy rating).