Merck and Schering-Plough earnings top estimates; is there growth story here?

Merck & Co. (MRK) today reported second-quarter earnings. While the pharmaceutical giant's profit fell 12 percent, it still managed beat analyst earnings forecasts thanks to a rebound in sales of its asthma drug Singulair, among other things.

Merck earned $1.59 billion, or 74 cents per share, compared to $1.77 billion, or 82 cents per share, in the year-earlier period. Excluding special items, it earned 83 cents, better than the 77 cents analysts had projected according to Reuters Estimates. Revenue fell three percent to $5.90 billion, but that was better than the $5.20 billion analysts had forecast. Excluding the impact of foreign exchange, total revenue would have actually increased three percent from the second quarter of 2008.
Looking at Merck's product sales, it's easy to see where its strengths lie and where the company is flailing. Merck's cholesterol drugs Zetia and Vytorin declined 10 percent to $1 billion, continuing the downturn after data from two clinical trials questioned the effectiveness of the medicines, showing the pills may work no better than a cheaper, older medicine, Zocor. Merck's antihypertensive medicines declined 4 percent to $906 million, and its cervical cancer vaccine, Gardasil, also suffered, recording an 18 percent sales decrease.

Meanwhile, these declines were offset by a 16 percent increase in worldwide sales of Singulair to $1.3 billion. However, while this is a definite highlight, following last year's concerns about potential link to suicide and the ensuing slaes drop, The Wall Street Journal notes that U.S. sales of Singulair have actually been hurt by an over-the-counter version of rival drug Zyrtec by Johnson & Johnson (JNJ). Also, the company's treatment of type 2 diabetes, Januvia, worldwide sales rose by 38 percent to $462 million.

Merck's income from partnerships also helped offset declines in some segments, as equity income from affiliates was $587 million, an increase of 12 percent, primarily as a result of higher contributions from AstraZeneca LP (AZN). Declines in marketing and administrative expenses, a lower tax rate and a decline in material costs also helped results, even as they were offset somewhat by 19 percent higher R&D costs.

"Driven by strong growth in our newest pharmaceutical products and in Singulair, Merck delivered solid operational results for the second quarter," said Richard T. Clark, chairman, president and chief executive officer in a statement. Trying to allay investors' concerns about the sales decline, he added, "[...] we're making significant investments to further strengthen our pipeline. With our continuing focus on scientific innovation, and the expanded pipeline and product portfolio that will result from our pending merger with Schering-Plough, Merck is well positioned as a global health care leader."

Merck said the $41.1 billion merger with Schering-Plough Corp. is progressing as planned, with the closing anticipated in the fourth quarter. Both companies' shareholders will vote on the merger on Aug. 7. Merck expects the combined company will achieve a higher compound annual growth rate the next four years when compared to Merck alone.

In a very detailed guidance not often seen, Merck reiterated its full-year 2009 profit and revenue forecasts of $3.15 to $3.30 per share excluding special items, and $23.2 billion to $23.7 billion, respectively. It expects Singulair to sell $4.4 to $4.7 billion in 2009.

Schering-Plough also reported its second-quarter earnings rose after lower special charges, but global revenue declined, hurt by the weak dollar. Excluding items, Schering-Plough earned 46 cents per share, beating analyst forecast according to Reuters Estimates by a penny. The company's sales of $4.65 billion were also higher than expectations.

The cholesterol drugs Schering sells in a joint venture with Merck obviously experienced similar sales decline, but sales of its Remicade for rheumatoid arthritis, rose 2 percent to $565 million.

Merck shares climbed over 5.5 percent by midday trading as it seems investors are catching on this story after years of punishing Merck for stagnant growth and different setbacks. Merck's restructuring is in full swing and the expected cost savings following the merger is even bigger. Not only did the two companies beat the Street's expectations, together they can pull off stronger growth, as they rely on each other's strengths.
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