Merck's strong quarter boosts year forecast
No. 2 drugmaker tops 1Q estimates on strong sales of cholesterol drug; cost-cutting credited for profit strength.
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Merck reported strong first-quarter profit Thursday, beating consensus projections on a slight increase in sales, and prompting the drugmaker to ramp up its earnings projection for the full year despite the imminent patent loss of its top-selling product, Zocor.

Shares of Merck (up $0.69 to $35.09, Research) rose as much as 2.5 percent in New York Stock Exchange trading.

Merck reported net profit of $1.52 billion, or 69 cents per share, up from $1.37 billion last year, or 62 cents a share. Excluding a 9-cent-a-share charge related to its cost-cutting, Merck reported earnings per share of 78 cents, beating First Call consensus projections of 72 cents.

The second-biggest drugmaker in the U.S. said sales increased 1 percent to $5.41 billion.

"We're very confident," said chief executive officer Dick Clark in a conference call with analysts. "No miracles have to happen here. It's just focus on the business and get your results. Obviously there's a long way to go, but I think we're on the right path."

The company, based in Whitehouse Station, N.J., said the strong profit was partly driven by sales from Zocor, a cholesterol-cutting blockbuster, as well as the asthma drug Singulair. Merck also attributed the earnings increase to its $5 billion belt-tightening plan to cut up to 7,000 jobs and close or sell five drug making plants.

The strong quarter prompted Merck to increase its full-year 2006 guidance to a range of $2.32 to $2.40 earnings per share, from its previously projected range of $2.28 to $2.36.

Merck's chief financial officer Judy Lewent said during the analyst call that the guidance was ramped up "to reflect that we had a strong first quarter."

The company increased projections in spite of the fact that Zocor, its No. 1 seller with $4.4 billion in 2005 revenue, is losing patent protection June 23, which is expected to trigger a plunge in sales. In the first quarter, Zocor sales rose 13 percent to $1 billion, possibly fueled by new prescriptions in anticipation of the patent loss, which would mean cheaper prices for patients when they switch to generic versions of the drug.

Merck announced that the tally of lawsuits from former patients of Vioxx, an arthritis painkiller that was pulled off the market in 2004 after a study showed increased risk of heart attack and strokes, has increased to 11,500. But Merck did not increase the fund set aside for its legal defense, which was last reported at $690 million. This fund does not cover potential damages to the company.

So far, Merck has lost one case and won two, and there was a split verdict in the most recent case.

Cost-cutting key driver in strong earnings

"I suspect they're raising earnings projections on better cost control," said Les Funtleyder, analyst for Miller Tabak, referring to Merck's multi-billion dollar cost-cutting plan. "Also, I got the sense that they think their new product launches are going to be better than we thought." Funtleyder rates the company a "buy" with a $40 price target.

Merck is awaiting the Food and Drug Administration's decision on Gardasil, its vaccine to prevent a virus that causes cervical cancer. The FDA has given the drug priority review status, generally a very good sign for potential approval, and the agency's decision is tentatively scheduled for June 8.

Analysts have been bullish on Gardasil, a potential blockbuster that has enjoyed strong data in clinical studies. Last year, the company unveiled two studies: one showing 100 percent efficacy in preventing the sexually transmitted human papillomavirus, which causes 70 percent of cervical cancer cases, and another showing 100 percent efficacy in preventing the sexually transmitted virus that causes 90 percent of vaginal lesions in young women, including genital warts.

CEO Clark also mentioned the recent FDA approval of Rotateq, a vaccine for rotavirus in children and babies, and the filing of Januvia, a diabetes treatment, as products that will drive Merck sales going forward.

The company also hopes to recover some of the impending Zocor sales vacuum with the cholesterol drug Vytorin, which combines Zocor with Schering-Plough's (up $0.42 to $19.31, Research) Zetia. Launched in 2004, Vytorin sales totaled $2.4 billion in 2005 sales.

Barbara Ryan of Deutsche Bank North America said in a note that Merck's biggest challenge, the Vioxx liability, has already been baked into the stock price, which has been discounted for $30 billion worth of possible damages.

"We believe Merck has put in place an aggressive, but achievable strategic plan, and with a new management team that is motivated and determined to execute, with a new sense of urgency and accountability," wrote Ryan, who rates Merck a "buy" with a price target of $38.

David Moskowitz, analyst for Friedman, Billings, Ramsey, has projected the highest Vioxx damage estimate, at $50 billion.

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To read about Big Pharma v. biotechs in year-to-date stock performance, click here.

The analysts interview for this story do not own Merck stock, but Deutsche Bank North America does seek business with them. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.