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Merck & Co. (MRK - Free Report) reported first quarter 2013 earnings of 85 cents per share, well above the Zacks Consensus Estimate of 78 cents. Tax benefits boosted first quarter 2013 earnings by 6 cents. Earnings, however, declined 14.1% from the year-ago period.

Revenues for the quarter fell 9.0% to $10,671 million and missed the Zacks Consensus Estimate of $10,997 million. Revenues were hit by the genericization of Singulair and a few other products and negative currency fluctuation (2%).

Including one-time items, first quarter 2013 earnings declined 7.1% to 52 cents per share.

The Quarter in Details

Merck’s Pharmaceutical segment posted sales of $8.9 billion, down 12%. Negative currency movement impacted Pharmaceutical segment sales by 2%. Products like Remicade, Simponi, Isentress, Zostavax and Gardasil performed well.

However, the strong performance of these products was offset by lower sales of Singulair, Maxalt, and Clarinex.

Singulair sales experienced a severe decline following its US patent expiry in Aug 2012. Sales fell 75% from the year-ago period to $337 million. We note that Singulair lost exclusivity in the EU in Feb 2013 and is experiencing a sharp decline in sales. The drug retains exclusivity in Japan until 2016.

Meanwhile, Remicade and Simponi combined sales increased 11% to $657 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 sales of $362 million, up 8%, in the reported quarter mainly due to strong growth in Europe and emerging markets.

The diabetes franchise, consisting of Januvia and Janumet, witnessed a 1% decline in sales which came in at $1.3 billion. The lower sales reflect a 2% negative impact of currency movement as well as lower sales in the US (down 5%) due to lower customer inventory levels.  While Januvia sales declined 4% to $884 million, Janumet sales grew 4% to $409 million.

Gardasil, Merck’s cervical cancer vaccine, recorded sales of $390 million, up 37% year over year. Sales were driven by increased vaccination of males in the US, higher public sector purchases and strong performance in emerging markets.

Zostavax sales came in at $168 million, up 121.1%, in response to the company’s promotional efforts and the availability of supply. The company reported strong demand in the US.

Zostavax should continue to be a strong growth driver considering that a large part of the US population is yet to receive the vaccine. Moreover, Merck intends to launch Zostavax outside the US later this year.

Meanwhile, Merck’s ProQuad, MMR II and Varivax vaccines recorded combined sales of $272 million, up 7%. Vytorin sales declined 11% to $394 million during the quarter.

Merck’s hepatitis C treatment, Victrelis posted sales of $110 million, down 1% from the year-ago period.

Emerging markets accounted for 21% of pharmaceutical sales in the first quarter of 2013 with China continuing to put in a strong performance.

Merck’s animal health segment posted sales of $840 million, up 2%. Results were driven by growth in companion animal products and poultry.

Consumer Care sales increased 3% to $571 million in the first quarter of 2013, mainly due to Dr. Claritin and Coppertone suncare products.

Marketing and administrative expenses declined 1.7% to $2.9 billion in the first quarter of 2013 due to productivity measures undertaken by the company. R&D spend increased 3% to $1.9 billion in the first quarter of 2013.

Cuts 2013 Guidance

Merck lowered its outlook for 2013 to reflect higher–than–expected pressure on sales including the impact of foreign exchange. Merck now expects adjusted earnings in the range of $3.45 and $3.55, down from its earlier guidance of $3.60 - $3.70 per share. The Zacks Consensus Estimate currently stands at $3.64 per share, well above the new guidance range. The new guidance also takes into account the revised tax rate of 22% - 23% (old guidance: 21% - 23%).

Revenues are now expected to decline 3% - 4% from 2012 levels instead of remaining flat as expected earlier.

Merck expects R&D spend to increase slightly from 2012 levels instead of remaining flat. The company spent $7.9 billion on R&D in 2012.

In addition to reporting first-quarter 2013 results, Merck announced a new share buyback program under which the company will use up to $15 billion to buy back shares. While half the authorized amount will be used for repurchasing shares over the next 12 months, the remaining $7.5 billion will not have any time limit.

Our Take

Merck has entered a challenging period with erstwhile blockbuster drug, Singulair, losing exclusivity in the US in early Aug 2012 and in the EU in Feb 2013. Merck’s first quarter results were disappointing with generics eating into sales. The decline in Januvia sales is also a matter of concern. Even though earnings exceeded expectations, the company cut its outlook for 2013 based on higher–than–expected pressure on sales.

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.

Merck currently carries a Zacks Rank #3 (Hold). Shares were down in pre-market trading. Merck’s results come a day after pharma major, Pfizer (PFE - Free Report) , reported first quarter results. Pfizer’s first quarter performance was also a letdown with the company missing on both earnings and revenues. Pfizer’s results were also hit by genericization and unfavorable currency movement and the company lowered its outlook for 2013.

Companies that currently look better-positioned include AbbVie (ABBV - Free Report) and UCB (UCBJF - Free Report) . While UCB is a Zacks Rank #1 (Strong Buy) stock, AbbVie holds a Zacks Rank #2 (Buy).

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