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Merck & Co. reported fourth quarter 2012 earnings per share (excluding special items) of 83 cents, a couple of cents above the Zacks Consensus Estimate. Earnings, however, declined 14.4% from the year-ago period.

Revenues for the quarter fell 4.5% to $11,738 million. However, revenues exceeded the Zacks Consensus Estimate of $11,515 million. Revenues were hit by the patent expiry of Singulair (indicated for the chronic treatment of asthma and relief of symptoms of allergic rhinitis) and negative currency fluctuation.

Including one-time items, fourth quarter 2012 earnings declined 6.1% to 46 cents per share.

Full year earnings increased 1.3% to $3.82 per share, a penny above the Zacks Consensus Estimate. Revenues, which declined 1.6% to $47.3 billion, were above the Zacks Consensus Estimate of $47.0 billion.

The Quarter in Details

Merck’s Pharmaceutical segment posted sales of $10.1 billion, down 6%. Negative currency movement impacted Pharmaceutical segment sales by 1%. Products like Januvia, Janumet, Zostavax and Gardasil contributed to sales.

However, the strong performance of these products was offset by lower sales of Singulair, Vytorin and Cozaar/Hyzaar.

Singulair sales experienced a severe decline following its US patent expiry in Aug 2012. Sales fell 67% from the year-ago period to $480 million. US sales were down 97%. We note that Singulair will lose exclusivity in the EU later this month. The drug retains exclusivity in Japan until 2016.

Meanwhile, Remicade and Simponi combined sales increased 13% to $645 million. We expect Merck to focus on improving penetration rates and drive growth in Europe, Russia and Turkey.

Isentress, the company’s product for HIV infection, recorded a 2% decline in sales which came in at $381 million in the reported quarter.

The diabetes franchise, consisting of Januvia and Janumet, continued to perform well, and witnessed growth in the US and Japan. Combined sales increased 18% to $1.6 billion. While Januvia sales increased 18% to $1.1 billion, Janumet sales increased 17% to $452 million. Merck is working on increasing sales of its diabetes franchise by gaining approval for additional indications.

Gardasil, Merck’s cervical cancer vaccine, recorded sales of $442 million, up 61% year over year. Sales were driven by increased vaccination of males in the US, higher public sector purchases and strong performance in Japan and emerging markets.

Zostavax sales came in at $225 million, up 188.5%, in response to the company’s promotional efforts and the availability of supply. Merck had initiated a TV advertising campaign in Apr 2012 to increase awareness about the risk of shingles. The company also launched a new branded print and online campaign.

Meanwhile, Merck’s ProQuad, MMR II and Varivax vaccines recorded combined sales of $306 million, up 11%. Vytorin sales declined 8% to $435 million during the quarter.

Merck’s hepatitis C treatment, Victrelis (boceprevir) posted sales of $115 million, down 22.8% sequentially. Merck has an agreement with Roche for the global marketing of Victrelis as part of a triple combination therapy.

Emerging markets accounted for 20% of pharmaceutical sales in the fourth quarter of 2012 with China continuing to put in a strong performance.

Merck’s animal health segment posted sales of $898 million, up 3%. Results were driven by growth in cattle and poultry.

Consumer Care sales increased 9% to $395 million in the fourth quarter of 2012, mainly due to Dr. Scholl’s, Claritin and Coppertone.

Marketing and administrative expenses declined 8.3% to $3.3 billion in the fourth quarter of 2012 due to productivity measures undertaken by the company and currency impact. R&D spend increased 4.8% to $2.2 billion in the fourth quarter of 2012.

2013 Guidance

Merck expects adjusted earnings in the range of $3.60 - $3.70 per share. Revenues are expected to remain close to 2012 levels. The company expects full year revenues to be negatively impacted by 1% - 2% at current exchange rates. The Zacks Consensus Estimate of $3.70 per share is already at the higher end of the company’s guidance range.

Merck expects R&D spend to remain similar to 2011 levels. The company spent $7.9 billion on R&D in 2012. The company’s late-stage pipeline is advancing with five regulatory filings slated for 2013.

Our Take

Merck’s fourth quarter results were impacted by the genericization of Singulair. With Singulair set to lose exclusivity in the EU later this month, we expect the top- and bottom-line to remain under pressure. Meanwhile, the company’s guidance seems to be a bit on the cautious side with the current Zacks Consensus Estimate of $3.70 per share already being at the higher end of the company’s guidance range.

Merck currently carries a Zacks Rank #3 (Hold). While headwinds remain in the form of the Singulair genericization, EU pricing pressure, unfavorable currency movement, US health care reform and pipeline setbacks, some of the company’s recent launches should start contributing significantly to the top line in the forthcoming quarters.

Currently, large-cap pharma stocks that look more attractive include companies like Novo Nordisk and Sanofi . Both stocks carry a Zacks Rank #2 (Buy).

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