Merck & Co. Inc. (MRK) Earnings Preview: Q1 Falls On Generic Competition

 @moranzhang
on April 30 2013 5:49 AM

Merck & Co. Inc. (NYSE: MRK), a Dow component and the world's second-biggest drugmaker by revenue, is projected to report lower first-quarter profit as generic competition to its top-selling drug Singulair cuts into results and research setbacks keep the company from getting new medicines to market.

Analysts surveyed by Thomson Reuters are projecting Merck, which reports earnings on Wednesday, May 1, 2013, to come in with earnings of 79 cents per share, down 20 percent from a year ago when it reported earnings of 99 cents per share. The consensus estimate has slipped from 85 cents over the past three months.

Revenue is projected to fall behind the year-earlier total of $11.73 by 5.4 percent, finishing at $11.09 billion for the quarter.

The Whitehouse Station, N.J.-based company announced in February it expects first-quarter earnings to be between 76 cents a share and 78 cents a share.

Merck predicted sales in 2013 would be similar to 2012 levels, excluding foreign exchange factors. However, foreign exchange has moved unfavorably since 2013 guidance was given on Feb. 1; that's especially the case with the Japanese yen, which has depreciated by about 6 percent and accounts for 12 percent of 2012 sales.

The Venezuelan government revealed in February its intention to devalue its currency; in response, Merck announced it will incur a one-time, after-tax loss due to revaluing its assets of 5 cents per share in the first quarter. The impact is also expected to be 2 cents per share from ongoing operations over the rest of 2013.

“While Merck confirmed full-year 2013 EPS guidance, we suspect it could be difficult to make up for this unexpected write-off,” Goldman analyst Jami Rubin said in an April 11 note.

Generic Competition

Merck's Singulair respiratory therapy had been the world's 11th-bestselling drug, generating annual sales of $5.5 billion, or more than 10 percent of company revenue.

Sales nosedived after it got U.S. generic competition last August. Singulair sales plunged 67 percent in the fourth quarter of 2012 to $480 million.

Merck lost European patent protection for the drug in February, so these numbers will undoubtedly worsen in Wednesday’s report. Analysts also expect further attrition in sales of older, off-patent drugs such as Fosamax, Maxalt and Cosopt/Trusopt.

Migraine drug Maxalt went off patent in the U.S. in December and will lose European market exclusivity in August of this year. Male pattern hair loss drug Propecia also faces generic copycats in 2013. These two drugs combined accounted for more than $1 billion in 2012 sales.

Merck is also accused in more than 3,300 lawsuits of ignoring signs that extended use of bisphosphonates such as Fosamax caused femurs to deteriorate in some patients. Approved for sale in the U.S. in 1995, Fosamax generated sales of as much as $3 billion a year until patent protection expired in 2008. Merck has said it faces another 1,230 cases alleging Fosamax caused similar fractures in jaws.

The good news for Merck is that diabetes drugs Januvia and Janumet continue to show strong growth, bringing in $5.7 billion in 2012. Considered as the next blockbuster products from Merck, the Januvia/Janumet franchise has already secured the top position in the global oral diabetes market and potential rivals haven't really mounted a significant threat so far.

Pipeline Uncertainty

Merck, which has introduced more new medicines in the past 60 years than any other company, ranks only fifth in new drug approvals over the past 10 years, according to Forbes.

The company is under pressure to replace lost revenue by getting new drugs approved and by wringing additional sales out of its key medicines.

Merck suffered a major setback in January when an experimental cholesterol drug failed to prevent heart problems and raised safety concerns. Tredaptive, which was expected to become a big seller in the U.S., was recalled in Europe following the negative study findings.

On Feb. 1, the drugmaker said it will delay seeking U.S. approval for experimental osteoporosis medicine odanacatib until 2014, a year later than planned. The postponement added to investor concerns about Merck’s inability to bring new products to market. The company is waiting for results of a second large study before presenting the medicine to regulators.

Odanacatib -- along with suvorexant -- had been one of the most highly anticipated near-term pipeline opportunities for Merck prior to the announcement.

For this year, Merck said it still aims to seek marketing approval for five drugs, including suvorexant for insomnia.

“Since this disclosure, we have observed that enthusiasm for this opportunity has waned,” Tony Butler, an analyst at Barclays, wrote in a March 16 report.

According to First Order Analytics, the sell-side consensus for odanacatib sales by 2020 declined from $1.2 billion in January to $900 million in March.

Stock Performance

“While we believe it is unlikely that Merck would pursue Pfizer-like divestitures of its non-pharmaceutical franchises, these businesses nonetheless have significant value associated with them,” J.P. Morgan analyst Chris Schott said in a March 12 note.

Schott believes Merck’s animal health and consumer franchises would be worth $20 billion to $25 billion if valued on a standalone basis, suggesting the core pharmaceutical franchise at Merck is currently trading at only 11.5 times  the projected 2013 EPS, roughly a multiple point below the company’s overall valuation and well below its peers.

However, looked at another way, Merck’s current valuation implies an unrealistically low negative 5 percent terminal growth rate.

Within J.P. Morgan’s U.S. major pharmaceutical group, Merck shares continue to reflect far lower terminal growth than the sector as a whole, suggesting a low level of investor confidence in the company’s pipeline and long-term business.

So far this year, Merck’s shares have gained 17 percent to close at $47.82 on April 30, 2013. 

One of Merck's main competitors in the pharmaceuticals industry is Johnson & Johnson (NYSE: JNJ). Other competitors include: Pfizer Inc. (NYSE: PFE), Eli Lilly & Co. (NYSE: LLY), Bristol-Myers Squibb Co. (NYSE: BMY) and GlaxoSmithKline Plc (NYSE: GSK).

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