Merck (MRK) Tops Q2 Earnings Expectations on Cost Cuts - Analyst Blog

Merck & Co. (MRK) reported second quarter 2014 earnings of 85 cents per share, beating the Zacks Consensus Estimate of 81 cents. Earnings grew 1.2% from the year-ago period.

Revenues for the quarter declined 1% to $10.9 billion. However, second quarter revenues were above the Zacks Consensus Estimate of $10.7 billion.

Including one-time items, second quarter 2014 earnings grew 126.7% to 68 cents per share.

The Quarter in Detail

Merck's Pharmaceutical segment posted revenues of $9.1 billion, down 2%.

Products like Janumet, Simponi, Isentress, Gardasil and Remicade performed well. However, the strong performance of these products was offset by lower revenues of Nasonex, Victrelis, PegIntron, Cozaar/Hyzaar, Temodar, and Januvia.

While products like Nasonex, Temodar and Cozaar/Hyzaar were affected by generics, higher competition impacted Victrelis and PegIntron sales.

Remicade and Simponi combined revenues increased 21% to $781 million with some help from currency (6%). Performance was boosted by Simponi's launch in additional countries and continued growth in existing markets. Approval for an additional indication in ulcerative colitis could drive sales further.

Isentress, the company's product for HIV infection, recorded revenues of $453 million, up 10%, in the reported quarter mainly due to strong growth in Europe and emerging markets.

The diabetes franchise, consisting of Januvia and Janumet, witnessed 2% growth in revenues which came in at $1.6 billion. Higher sales in Europe and emerging markets were partially offset by weakness in Japan and lower sales in the U.S.

While Januvia revenues decreased 1% to $1.1 billion, Janumet revenues grew 9% to $519 million. Merck is working on penetrating the sulfonylurea class.

Gardasil, Merck's cervical cancer vaccine, recorded revenues of $409 million, up 7% year over year.

Merck's ProQuad, MMR II and Varivax vaccines recorded combined revenues of $326 million, down 4%. Vytorin revenues remained flat at $417 million during the quarter.

Merck's hepatitis C virus (HCV) treatment, Victrelis posted revenues of $46 million, down 60% from the year-ago period. Revenues continue to be affected by the entry of Sovaldi as well as contraction in several markets due to warehousing and a large number of clinical trials.

Merck's animal health segment posted revenues of $872 million, up 2%. Although poultry and aqua products recorded growth, this was partially offset by the voluntary suspension of Zilmax (feed supplement for cattle) in the U.S. and Canada. Newly launched Bravecto performed well.

Consumer Care revenues grew 19% to $583 million in the second quarter of 2014. The company will be selling off its Consumer Care business to Bayer (BAYRY) in the second half of the year for $14.2 billion.

Marketing and administrative expenses declined 6.7% to $2.9 billion in the second quarter of 2014 due to productivity measures undertaken by the company. R&D spend decreased 12.5% to $1.6 billion in the second quarter of 2014.

2014 Guidance

Merck expects to earn $3.43 - $3.53 per share on revenues of $42.4 billion - $43.2 billion. The guidance now excludes the impact of the potential Venezuelan Bolivar devaluation that was previously included in the range. The guidance also takes into account a 6-9 cent dilution that could result from the upcoming sale of the Consumer Care segment.

The Zacks Consensus Estimate of earnings of $3.49 per share and revenues of $42.6 billion is within the guidance range.

Merck expects R&D as well as marketing and administrative spend to decline from 2013 levels. The company spent $7.1 billion and $11.7 billion on R&D and marketing and administrative matters, respectively, in 2013.

Our Take

Merck's second quarter results were better-than-expected with the company beating on earnings as well as revenues. Although revenues declined from the year-ago period, cost control efforts helped the company record growth in earnings.

We remain concerned about the performance of Januvia, which declined from the year-ago period. With Singulair and a few other products facing generic competition, we expect the top-line to remain under pressure.

The company will continue to look toward cost-cutting initiatives and share buybacks to drive the bottom-line.

We are also positive on Merck's efforts to expand its pipeline and to focus on its core areas of expertise. The company has launched a tender offer in connection with its upcoming acquisition of Idenix Pharmaceuticals (IDIX). With the Idenix acquisition, Merck is looking to boost its HCV portfolio.

Merck is a Zacks Rank #3 (Hold) stock. A better-ranked stock in the pharma sector is Allergan (AGN), a Zacks Rank #1 (Strong Buy) company.