Earnings Preview: Merck – Analyst Blog

Merck (MRK) is scheduled to release its first quarter 2010 earnings on May 4, 2010. The company is expected to earn 75 cents during the quarter, according to the Zacks Consensus Estimate. The company is expected to provide its outlook for 2010 along with first quarter results.

 

 

Merck’s earnings per share (EPS) for the fourth quarter of 2009 came in at 79 cents (excluding non-recurring items), marginally beating the Zacks Consensus Estimate of 78 cents but lower than 87 cents reported in the year-ago period.

 

Merck reported revenues of $10 billion compared with $6 billion in the fourth quarter of 2008. However, this is not comparable since the reported quarter’s results included Schering-Plough operations following the merger on November 3, 2009. Revenues were favorably impacted by 1% due to foreign exchange movement.

 

Products that recorded robust sales during the quarter included Singulair, with sales of $1.3 billion (up 12% compared with fourth quarter of 2008); Isentress, the company’s product for HIV infection, with $234 million in sales (up 80%) and the diabetes franchise, consisting of Januvia and Janumet. While Januvia sales grew 35% to $558 million, Janumet recorded sales of $202 million, an increase of 69%.

 

 

Estimate revision trends among the analysts depict a clear negative bias for the company’s earnings in the forthcoming period. Over the last 30 days, 5 analysts covering the stock have made downward revisions for the first two quarters of fiscal 2010 and fiscal 2011, with estimates for fiscal 2010 being lowered by 4 analysts.

 

Upward revisions have been few, with only one analyst increasing the estimates for the first quarter and fiscal 2011. For the second quarter and fiscal 2010, two analysts have raised their estimates.

 

There are a number of reasons for the negative sentiment regarding Merck. Although many of Merck’s drugs recorded robust growth during 2009, the company is facing patent expiration for two of its key drugs, which has led analysts to lower their outlook for the next few quarters.

 

The company’s hypertension franchise products, Cozaar (losartan potassium) and Hyzaar (Cozaar and hydrochlorothiazide), that generated sales of $3.6 billion in 2009, have lost their patents both in the U.S. and some major European markets. Sales are expected to plunge with the entry of generics. These drugs accounted for more than 13% of total revenues.

 

Meanwhile, Merck is witnessing a steady decline in sales of one of the most significant products in its portfolio, Gardasil, the cervical cancer vaccine with sales of $1.1 billion in 2009, a 20% decline from the previous year. Although Gardasil (approved for the age group of 9−26 years) sales ramped very quickly following its launch, the drug has struggled recently due to the difficulty in penetrating patients and competition from GlaxoSmithKline’s (GSK) cervical cancer vaccine, Cervarix.

 

In addition, estimates were revised downward to reflect the impact of the health care reform. Merck expects its first quarter revenue to be hit by $35 million due to Medicaid rebates and another $150 million due to the elimination of a tax benefit for retiree prescription drug coverage. For the full year, the Medicaid rebate is likely to reduce revenues by $170 million (including $35 million in the first quarter). The bill is likely to have an unfavorable impact of $300−$350 million on 2011 sales.

 

 

The magnitude of revisions is quite significant following the fourth quarter results. Overall, estimates for the first quarter have gone down from 82 cents to the current level of 75 cents per share in the last 90 days. For fiscal 2010, estimates have slipped from $3.47 to the current level of $3.41 per share over the past 3 months. A similar trend can be seen for 2011, with estimates going down by 4 cents to $3.93 in the last 90 days.

 

The current Zacks Consensus Estimates for 2010 ranges from a low of $3.35 to a high of $3.50. The higher estimates reflect the expectation that Merck will be a dominant player in the long term. The merger with Schering, along with meaningful contribution from some of the recently launched products, are expected to help the company to recoup lost sales of some of its key products that have already lost or are slated to lose patent exclusivity. Moreover, the company’s deep pipeline holds potential.

 

On the flip side, the lower estimates reflect concerns regarding the company’s long term guidance of high single digit EPS growth.

 

 

Going by past trends, we expect Merck to exceed estimates. The company has surpassed expectations in the last 3 quarters with a positive surprise of 1.28% and 9.76% in the fourth and third quarters of fiscal 2009, respectively, with a positive four-quarter average of 3.39%. This means that on an average, Merck has topped the Zacks Consensus Estimate by 3.39% over the last four quarters.

 

 

We currently have a Neutral recommendation on Merck, which is supported by the Zacks #3 Rank (Hold). We believe Merck’s merger with Schering-Plough will help it address certain impending patent cliffs and pipeline failures. In addition, the company’s pipeline must deliver to recoup some of the lost sales of Cozaar and Hyzaar.

 

In order to build its long-term portfolio, Merck is entering into several in-licensing deals, the most recent being with Nycomed for the rights of Daxas. The company entered into 51 such deals in 2009, a trend that is expected to continue this year as well.

 

Merck’s pipeline consists of more than 20 candidates in phase III development or under regulatory review, targeting areas of unmet medical need. With a large number of candidates in the final stages of development, the company’s R&D budget is likely to increase in 2010.

 

Some of the recent product approvals of Merck include Simponi (golimumab), Saphris (asenapine) and Elonva, (corifollitropin alfa injection). These drugs should be able to contribute to the top line over time.