Merck Narrows Forecast After Sales of Januvia Decline

Merck & Co., the second-biggest U.S. drugmaker, narrowed its full-year forecast as the company continues an overhaul of its sales and research operations.

Profit for 2013 will be $3.48 to $3.52 a share, Merck said today in a statement. The previous outlook was for $3.45 to $3.55. Chief Executive Officer Ken Frazier said he is still looking at whether Whitehouse Station, New Jersey-based Merck’s animal health and consumer businesses, as well as its drug projects, might be divested or partnered outside the company.

“A company is a living, breathing thing, and over time one has to evaluate the opportunities going forward,” Frazier said in an interview today. “The question becomes, are we the right owner of those businesses?”

Merck this month announced it would fire 8,500 workers and overhaul research and development. The firings add to 7,500 job cuts already announced, amounting to a 20 percent reduction in Merck’s workforce. The company had about 80,000 employees as of Sept. 30. Drugmakers have been cutting expenses, research programs and positions to focus on creating new medicines, as well as selling or splitting off non-pharmaceutical businesses.

Merck’s changes are about focus, not slashing expenses, Frazier said. “Merck is and will remain committed to investing in R&D internally, and importantly, externally,” he said. “It’s about precision, it’s about focus, it’s not about reduction.”

Shares Decline

Merck declined 2.6 percent to $45.35 at 4 p.m. New York time. The company has struggled to keep investor support, with its stock falling 1.7 percent in the last 12 months, compared with a 23 percent gain in the Standard & Poor’s 500 Pharmaceuticals Index.

Third-quarter revenue fell 4 percent to $11 billion, missing the $11.1 billion estimate of analysts, as Januvia sales dropped 5 percent and foreign currency exchange weighed on results.

“Januvia/Janumet widely missed consensus,” said Mark Schoenebaum, an analyst with International Strategy & Investment Group LLC, in a note to clients. “We would expect the company to back off its prior guidance to expect ‘mid-single digit’ year-on-year Januvia franchise growth.”

Net Income

Net income dropped to $1.12 billion, or 38 cents a share, from $1.73 billion, or 56 cents, a year earlier, the company said. Earnings, excluding one-time items, were 92 cents a share, beating by 5 cents the average of 17 analysts’ estimates compiled by Bloomberg.

“Merck sentiment continues to get really bad,” Schoenebaum said. “I’ve become increasingly frustrated with fighting this management discount.”

Merck shareholders have been most concerned that sales of Januvia will face more competition, said Tony Butler, an analyst with Barclays Plc. Third-quarter sales of Januvia fell to $927 million from a year earlier.

Half-a-dozen new treatments that could compete with Januvia may begin selling in the next two years. The medicine has already experienced most of its potential growth, while competitors are cutting prices and marketing harder, Butler said. “Both volume and pricing opportunities for Januvia/Janumet are limited going forward,” he said in a note to clients this month.

Januvia Rebates

The company’s sales unit is pushing to expand prescriptions of Januvia in the face of new competitors. It’s had to offer rebates and discounts in order to hold into what it says is around an 80 percent market share of the class of drugs, called DPP4s.

“The branded oral diabetes market is relatively flat,” Adam Schechter, Merck’s president of global human health. “The rebate and discounting will continue to be aggressive in the marketplace,” he said on a conference call discussing results today. “We are losing a little bit of market share each month.”

That may be the new reality for the best-selling drug in the class. “We view this is as a weak quarter for Merck that highlights some of the issues that led to our downgrade back in July,” said Alex Arfaei, an analyst with BMO Capital Markets Corp. who has a “market perform” rating on the stock. He said new competition in the diabetes market could force down expectations for the company.

Gardasil, Remicade

Sales of the Gardasil vaccine rose 15 percent to $665 million from a year earlier, while revenue from the rheumatoid arthritis drug Remicade jumped 17 percent to $574 million.

Under new R&D chief Roger Perlmutter, Merck is overhauling its research labs to put more emphasis on vaccines, cancer, diabetes and hospital care. The moves will save $2.5 billion a year by 2015, according to the company.

Perlmutter said today he was displeased with the quality of the company’s R&D efforts, particularly with submissions to U.S. regulators.

“I’m not happy with where we stand in terms of how our organization has been able to deliver documents that meet regulatory guidelines,” Perlmutter said on the call. “I have been leaning into this process very, very heavily.” He planned to hire a new head of global safety, as well as make additional hires to improve the safety and quality of the company’s clinical trials.

“Merck’s belated attempts to restructure their R&D organization are encouraging, but we continue to expect material earnings disappointment compared with consensus forecasts,” Andrew Baum, an analyst with Citigroup Inc., said in a note to clients before the earnings report was released.

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