Merck Profit Tops Estimates as Sales of Diabetes Drugs Grow

Merck Second-Quarter Profit Beats Estimates on Diabetes Drugs
Merck has been cutting thousands of jobs and trying to boost demand of existing products to prepare for when Singulair faces cheaper copies in August. Photographer: JB Reed/Bloomberg

Merck & Co., facing generic competition in August to its top-selling asthma drug Singulair, reported second-quarter profit that beat analyst estimates on higher sales of the diabetes medicines Januvia and Janumet.

Earnings excluding one-time items of $1.05 a share beat by 4 cents the average of 18 analyst estimates compiled by Bloomberg. Net income fell 11 percent to $1.79 billion, or 58 cents a share, from $2.02 billion, or 65 cents, a year earlier, the Whitehouse Station, New Jersey-based company said today in a statement. Revenue climbed 1.3 percent to $12.3 billion.

Merck has been cutting thousands of jobs and trying to boost demand of existing products to prepare for when Singulair loses patent protection. Led by its diabetes franchise, sales of Merck’s top drugs rose almost across the board, and Merck said 18 percent of revenue came from emerging markets.

The result “looks solid and we’d expect stock to outperform a bit today,” wrote Mark Schoenebaum, an analyst with ISI Group in New York, in a note to clients today. He called the company his “top pick” among pharmaceutical stocks.

Merck reiterated its earnings forecast for the year, of $3.75 to $3.85 a share. Its shares gained 4.1 percent to $45.10 at 4 p.m. New York time, their highest closing price since 2008.

The focus now turns to the company’s medicines in development after research setbacks in recent years, said Tony Butler, an analyst with Barclays Plc in New York. Merck stepped up research and development efforts after Chief Executive Officer Kenneth Frazier took over at the start of 2011.

‘Undervalued’ Pipeline

“We have long held the view that Merck’s pharmaceutical R&D pipeline is among the most undervalued in the pharmaceutical sector,” said Butler said in a note to clients before the earnings were released.

The stock had gained 15 percent this year through yesterday, compared with an 8 percent climb by the Standard & Poor’s 500 Index. Most of Merck’s increase has taken place since June, when the company announced positive trial results for osteoporosis drug odanacatib and sleep treatment suvorexant.

“The company remains focused on translating cutting-edge science into medically important products,” Frazier said in a statement today. “We’re seeing significant progress in the pipeline this year, and we expect six major filings over the next 18 months.”

Currency Exchange

Worldwide sales rose 5 percent when the currency exchange impact was excluded, the company said. Those pressures will continue this year, said Chief Financial Officer Peter Kellogg, as will budget cuts by European governments.

“The euro has deteriorated significantly since we last spoke,” Kellogg said on a conference call today discussing the results. He predicted that foreign exchange rates would cut Merck’s full-year sales by about 3 percent.

Among the six biggest U.S.-based drugmakers, only Pfizer Inc. and Abbott Laboratories get more of their total revenue outside the U.S. than Merck.

Maintaining the full-year forecast and beating analyst estimates this quarter is a boost for the company, given the currency trends, said Catherine Arnold, an analyst with Credit Suisse Group AG in New York.

“There was some concern among investors on this front given f/x headwinds, EU austerity measures and Singulair,” she said in a note to clients today. “It is hard to find anything wrong with the quarter.”

Rights End

Singulair’s exclusive sales rights expire in the U.S. in August, and Merck has been trying to develop new medications to replace it. Second-quarter sales of the drug rose 5.7 percent to $1.43 billion, about 12 percent of Merck’s revenue.

Januvia, a diabetes medication that lowers blood sugar levels, saw sales rise 36 percent to $1.06 billion. Sales of Janumet, a combination pill that also uses the active ingredient in Januvia, rose 28 percent to $411 million.

To help replace Singulair, the company is counting on at least two experimental products. Odanacatib is Merck’s osteoporosis drug that may be worth $2.5 billion a year, according to Barclays’ Butler. Merck ended a trial of the drug early after the drug was found to be more effective than expected. The company plans to submit it to U.S. regulators for approval next year.

Insomnia Treatment

Suvorexant is the company’s insomnia drug that could compete with generic versions of the pills Ambien and Lunesta, and may be worth as much as $1 billion a year, according to Butler. The drug, which blocks the brain’s systems to stay awake, may have fewer side effects than current medicines, which turn up the body’s sleep system.

Merck’s two other businesses, animal health and consumer products, grew as well. Sales of animal health drugs for pets and livestock grew 8 percent from a year before to $865 million. Consumer care sales grew 2 percent to $552 million, the company said. The consumer line makes products including Coppertone sun lotion and Dr. Scholl’s shoe insoles.

CEO Frazier said he has no plans to sell or spin off those units, as Pfizer Inc. is doing with its animal health and nutrition businesses. “We’ll continue to look at them, but we’re pleased to have them in our portfolio right now,” Frazier said on the call.


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