Merck Cuts Profit Forecast as Buyback Boosted $15 Billion

Merck & Co., facing generic competition to what was once its best-selling drug, cut its full-year guidance in anticipation of lower sales and said it would start buying back as much as $15 billion in shares.

Merck’s stock fell the most in three months. Earnings excluding one-time items for 2013 are now projected to be $3.45 to $3.55 a share, the Whitehouse Station, New Jersey-based drugmaker said today in a statement. That’s 15 cents lower than the outlook given in February. First-quarter net income declined to $1.59 billion, or 52 cents a share, from $1.74 billion, or 56 cents, a year earlier, the company said.

Merck has been eliminating jobs since the 2009 acquisition of Schering-Plough and has been trying to boost demand for other products after asthma drug Singulair began facing generic competition in August. Singulair sales fell 75 percent to $337 million last quarter, while Januvia, a diabetes treatment that is now Merck’s top product, dropped 4 percent to $884 million.

“It doesn’t look pretty,” wrote Mark Schoenebaum, an analyst with International Strategy & Investment Group, in a note to clients. The share buyback “is now the second ‘bone’ that management has thrown to the angry shareholder mob.”

First-quarter earnings, excluding one-time items, were 85 cents a share, beating by 6 cents the average estimate of 17 analysts compiled by Bloomberg. The earnings were helped by a $439 million, or 6 cents a share, tax benefit. Unfavorable rates of foreign currency exchange cut sales by 2 percent, Merck said.

Stock Drops

Merck shares fell 2.8 percent to $45.69 at the close in New York. The stock has gained 16 percent in the last 12 months. Merck will buy back $7.5 billion shares in 12 months, with another $7.5 billion available, the company said.

“We fell short of our expectations for top-line performance,” Merck Chief Executive Officer Ken Frazier said on a conference call today. The results “are not indicative of the future opportunities of our business,” he said. The company said the lackluster sales of Januvia were caused by wholesalers cutting inventory.

It has been a disappointing quarter for U.S. drugmakers, with shares of Pfizer Inc., Bristol-Myers Squibb Co. and Eli Lilly & Co. all falling after reporting results.

R&D Replacement

Merck replaced its head of research and development, Peter Kim, last month with Roger Perlmutter, formerly of Amgen Inc. The change came after setbacks including the company’s decision in December to end development of a cholesterol drug and its failure to win approval of a drug to slow the growth of sarcoma.

Perlmutter said Merck’s R&D plans would get a thorough review. “You bring in a new guy and a fresh pair of eyes, and there are going to be some changes that take place,” he said on a conference call today. That could include accelerating some programs, cutting others, and looking for new assets outside the company, he said.

“In my view, I always want more,” Perlmutter said. “It’s never good enough. I want more products, and I want those products to be the very best possible. I’m not so concerned about where those products come from.” He plans to announce a first round of changes in the next three to six months, he said.

“The news that head of R&D Peter Kim is leaving the company supports the idea that Merck has lost its way to some degree in terms of R&D,” Timothy Anderson, an analyst with Sanford C. Bernstein & Co. who has an outperform rating on the stock, said in a note to clients before the earnings announcement. “This is problematic for the stock because investors expect Merck to be a best-in-class R&D organization.”

Earlier Announcement

Merck had previously downplayed results for the first quarter, saying in February that 2013 profit would fall as Singulair faced generic competitors. The company also announced that first-quarter earnings excluding certain items would be 76 cents to 78 cents, 5 cents lower than originally projected, because of the devaluation of the Venezuelan currency.

Sales fell short of analysts’ estimates for $11.1 billion, dropping 9 percent to $10.67 billion. Sales of drugs, Merck’s biggest business, fell 12 percent to $8.89 billion.

The company said it expects full-year sales to be 3 percent to 4 percent lower than 2012. It also expects research and development spending to rise, and its tax rate to be 22 percent to 23 percent, up from 21 percent to 23 percent.

The new share repurchase amounts to 11 percent of Merck’s market capitalization as of yesterday’s close and gives the company a total of $16.1 billion to use for buybacks, including an older repurchase program.

“This share repurchase program, combined with our strong dividend, reinforces our continued commitment to delivering increased value to shareholders,” Frazier said in a statement.

(Updates with closing share price in sixth paragraph.)
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