Merck profit strong, sales weak

The drugmaker's earnings double from AstraZeneca-related tax gain, but sales only edge up 1%; CEO defends Vytorin.

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By Aaron Smith, staff writer

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NEW YORK ( -- Merck said Monday its first-quarter earnings jumped due to income from a partnership, but the drugmaker's sales showed just a slight gain.

Quarterly earnings rose to 89 cents per share, without restructuring charges and a tax gain from an AstraZeneca (AZN) partnership, the company said. This is up from 84 cents in the year-ago quarter. Analyst consensus had expected a 3% gain to 86 cents, according to Thomson Financial.

When including the $1.4 billion after-tax gain from the AstraZeneca partnership, earnings were $1.52 per share, nearly double the 78 cents per share seen in the same period last year. The company said its net income was $3.3 billion, compared to $1.7 billion in the first quarter of 2007.

Merck's (MRK, Fortune 500) sales edged up 1% to $5.8 billion in the first quarter, falling short of analyst expectations of a 6% gain to $6.1 billion. This is partly because sales from the bone disease treatment Fosamax, which lost patent protection, dropped 37% to $470 million.

Merck said that sales for its battered cholesterol combo Vytorin, and for the cholesterol drug Zetia, rose 6% to $1.2 billion. Merck splits these sales with its partner Schering-Plough (SGP, Fortune 500).

The sales gain is in spite of a Jan. 14 study from Merck and Schering saying that Vytorin is no more effective in reducing arterial plaque than its generic ingredient simvastatin. Ken Frazier, Merck director of global human health, said in a conference call with analysts Monday that Vytorin prescriptions dropped after that study was released, but sales seemed to have recently "stabilized." Nonetheless, the company reduced its 2008 sales guidance for Vytorin and Zetia by $700 million.

Merck has lost nearly one-third of its stock value since the study came out. This includes the 7% plunge that occurred since March 30, when scientists at the American College of Cardiology conference in Chicago suggested that Vytorin patients are better off taking the older "statin" class of cholesterol-controlling drugs. This class includes Merck's low-cost generic drug simvastatin.

In the Monday conference call with analysts, Merck Chief Executive Richard Clark defended Vytorin, noting that it is still effective in reducing LDL, a harmful type of cholesterol. This is the use for which it was originally approved by the Food and Drug Administration.

"Vytorin and Zetia remain valuable treatment options to lowering LDL cholesterol," said Clark. "We will advocate for continued use of these important medicines."

Clark said he "takes the criticisms very seriously" in regards to Vytorin, but he decried the "lack of scientific discussion" from critics at the ACC conference.

Robert Hazlett, analyst for BMO Capital Markets, said that "negative adjustments" to wholesale purchases of Vytorin are likely in the second quarter, but he doesn't expect any more "dramatic downdrafts" in the use of Vytorin and Zetia.

"We're not expecting any material additional calamities for these drugs," said Hazlett. "We hope the worse is behind us."

The company said overall sales were driven by the asthma treatment Singulair, which increased 10% to $1.1 billion. Sales tripled to $272 million for the diabetes drug Januvia, which was launched in 2006. For the cervical cancer vaccine Gardasil, which was also launched in 2006, sales rose 7% to $390 million.

Merck reaffirmed its full-year 2008 guidance of $3.28 to $3.38 earnings per share. Jami Rubin, analyst for Morgan Stanley, said in a published note that it was "highly encouraging" that Merck was able to maintain its full-year guidance while reducing its Vytorin sales estimate by $700 million. Rubin said this "proves to us the company's increased maneuverability and ability to cut costs."

Merck is one of the biggest U.S. drugmakers, behind Johnson & Johnson (JNJ, Fortune 500) and Pfizer (PFE, Fortune 500).

The analysts quoted in this story do not own Merck stock. BMO has not conducted business with Merck in the last 12 months, though Morgan Stanley has investment ties with the company. To top of page

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