Merck's earnings pop, but shares slump

Drugmaker posts higher operating income and matches expectations for sales; CEO backs cholesterol drug Vytorin.

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By Aaron Smith, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Merck & Co. reported a surge in fourth-quarter operating earnings Wednesday that exceeded analysts' estimates, but shares slumped in early trading.

The drugmaker said earnings, before extraordinary charges, jumped to 80 cents per share in the fourth quarter.

On that basis, analysts polled by Thomson Financial had forecast an increase in quarterly earnings to 74 cents per share.

Sales edged up 3% to $6.2 billion in the fourth quarter, meeting the consensus analyst estimate.

Despite the solid results, Merck's (MRK, Fortune 500) stock fell 4% in morning trading.

Including charges related to a $4.85 billion settlement over the arthritis painkiller Vioxx, the company swung to a net loss of 75 cents per share, or $1.6 billion, in the fourth quarter.

Merck withdrew Vioxx in 2004 after a study linked the drug to increased risk of heart and strokes, prompting tens of thousands of lawsuits against the company.

The latest earnings come as the drugmaker is sailing in troubled waters. Merck and its partner Schering-Plough (SGP, Fortune 500) announced on Jan. 14 the results of a failed study involving the cholesterol-controlling combination drug Vytorin. The study showed that Vytorin is no more effective at reducing artery-clogging deposits than its generic ingredient Zocor when taken alone.

Zocor, also known as simvastatin, was a Merck blockbuster before its patent expired in 2006. The Vytorin combo also contains the Schering-Plough drug Zetia. Vytorin sales increased 34% to $1.5 billion in the fourth quarter, but that's before the recent problems emerged.

During a conference call with analysts, Merck's chief executive Richard Clark backed Vytorin as a safe and effective drug. He also said the backlash against it is a strictly American phenomenon, and overseas sales have not been affected.

"Let's keep this trial in perspective," Clark said, referring to the failed study. He said that in the study, Vytorin had demonstrated superiority in lowering LDL - a harmful type of cholesterol and an "established risk factor for heart disease" - when compared to Zocor.

Nonetheless, since the study was released, Merck stock has plunged 20% and Schering's has plummeted 25%.

"The company exceeds forecast and fundamentals remain robust," analyst Les Funtleyder of Miller Tabak wrote in an email.

"But (isn't there always a but?) Vytorin and other media overhangs along with a choppy market may weigh on the shares in the near-term," he said.

In an analyst note, Barbara Ryan of Deutsche Bank North America lowered her 12-month price target on Merck stock to $62 from $70 because of "increased uncertainty" related to Vytorin.

Merck backed its 2008 profit outlook, saying it still expects to earn $3.28 to $3.38 per share, without charges, for the year

That suggests that the drugmaker doesn't believe there will be a material impact to earnings from Vytorin, Funtleyder said.

For the full year, Merck reported operating earnings of $3.20 per share. Including charges, the company said its earned $3.27 billion, or $1.49 per share, in 2007.

Worldwide sales jumped 7 percent to $24.2 billion in 2007, driven by diabetes drug Januvia, cervical cancer vaccine Gardasil, asthma inhaler Singulair and the Varivax vaccine for children, Merck said.

Gardasil sales exceeded blockbuster levels during its first full year on the market, with $1.5 billion total sales in 2007, CEO Clark said.

Like many other U.S.-based drugmakers, Merck credited the weak dollar with helping to boost its overseas sales. Merck said that foreign exchange boosted sales by 2% for the year and 4% for the fourth quarter. To top of page

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Most stock quote data provided by BATS. Market indices 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.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.