Merck earnings guidance fails to inspire

NEW YORK (CNNMoney.com) -- Merck failed to excite investors with its financial guidance for 2007 and 2008, causing a temporary stock drop, but analysts were reluctant to condemn the drugmaker.

"I'm not saying that people should be happy, but I'm saying that people shouldn't be surprised by what we view as conservative guidance," said Seamus Fernandez, analyst for Leerink Swann.

The New Jersey-based drugmaker Merck & Co. reaffirmed its guidance for earnings per share, excluding items, of $3.08 to $3.14 for 2007 and $3.28 to $3.38 for 2008. Analysts polled by Thomson Financial had projected a profit of $3.15 EPS for 2007 and EPS of $3.39 for 2008, excluding items.

Fernandez said these numbers are actually higher than the 2007 guidance that Merck originally projected last year: non-GAAP EPS of $2.51 to $2.59.

Nonetheless, the news caused Merck's (Charts, Fortune 500) stock to fall 3 percent at the start of trading, though the stock recovered by midday.

The incoming patent loss of Fosamax in 2008, an osteoporosis drug with sales expected to reach $3 billion this year, hangs over the company like a black cloud. But Merck executives hailed their cost-cutting efforts and the performance of new products as making up for the impending sales vacuum.

"We continue to engineer the company into a lean and effective competitor for the future," said chief financial officer Peter Kellogg, in a conference call with analysts. Kellogg said Merck is "on track" to eliminate 7,000 jobs by 2008, having already cut 6,000.

Barbara Ryan, analyst for Deutsche Bank North America, said in a published note to investors that Merck's cost-cutting strategy, particularly in manufacturing, "is a key factor for driving EPS growth and achieving its stated goals, and we believe this remains underappreciated by the Street."

Merck chief executive Richard Clark said that the fast-growing sales performance of Gardasil, a vaccine for cervical cancer, and the diabetes drug Januvia, should offset the upcoming patent loss of Fosamax. He said the success of these relatively new products, launched in 2006, is partly responsible for the company raising its guidance several times over the last year.

"You do not underestimate the Merck organization and the strength of its employees," said Clark, in a teleconference with analysts.

Gardasil sales totaled $1.1 billion during the first nine months of 2007 and Januvia sales were $400 million during the period. Even before they entered the market, analysts considered these products potential blockbusters.

Merck plans to reveal more guidance details during its annual analyst's day on Dec. 11 at its headquarters in Whitehouse Station.

Merck is the No. 3 U.S. drugmaker in terms of sales, behind Johnson & Johnson (Charts, Fortune 500) and Pfizer (Charts, Fortune 500).

The analysts interviewed here do not own stock in Merck, but Deutsche Bank does seek investment banking business with the company.