Merck's big earnings disappointment

A drug-by-drug analysis of the pharmaceutical's results. Sales came in 4% below expectations.

By Forbes Digital May 1, 2013 12:10PM

Prescription medicine expenses © Don Farrall Photodisc Getty ImagesBy Matthew Herper


Merck's (MRK) first-quarter earnings are a big disappointment. Technically, earnings per share of $0.85 beat analyst forecasts by six cents due to one-time tax benefit. Meanwhile, overall sales of $10.7 billion were 4% -- a full $500 million -- below expectations. In order to try to salve the wound of this major miss, Merck announced a huge $15 billion share buyback to prop up earnings per share and the stock price.


ISI Group analyst Mark Schoenebaum notes this is "the second bone that management has thrown to the angry shareholder mob." The first was replacing long-time research chief Peter Kim with Roger Perlmutter, who ran R&D at Amgen (AMGN). Merck, he notes, is the only big pharmaceutical company that has not initiated big cuts to research and development spending or sold off divisions in response to the declining ability of drug companies to invent new, big-selling drugs.


And Merck's drugs are no different. The big issue this quarter was Januvia, Merck's best-selling diabetes drug, and Janumet, a single pill that combines Januvia and a popular generic. Many analysts expected Janumet to become the best-selling drug in the world.


As you can see in the table below, Januvia came in 19% below analyst forecasts, and Janumet fell 11% below those forecasts. Merck said in its press release that this was due to wholesalers stocking up on inventory. And Schoenebaum said that according to prescription data from IMS Health, which tracks sales at pharmacies, indeed show increases in Januvia use.


Unfortunately, Januvia and other similar drugs are currently being reviewed by the Food and Drug Administration to see if they increase the risk of a serious and painful condition called pancreatitis. So far, there is no conclusion from this safety review. But if the review is affecting overall demand it could seriously hurt Merck's ability to grow sales.


It doesn't help that this echoes other problems in Merck's past, including the withdrawal of Vioxx, the warnings about suicidal ideation that hurt sales of allergy drug Singulair, and the controversy over the effectiveness of cholesterol-lowering medicines Vytorin and Zetia at preventing heart attacks.


For more background, see my recent profile of Merck CEO Ken Frazier.

Where Merck missed





Drug Name

First Quarter Sales ($MIL)

Analyst Forecast ($MIL)

Difference (%)

Januvia

884

1,090

-18.90%

Zetia

629

651

-3.38%

Remicade

549

557

-1.44%

Janumet

409

457

-10.50%

Vytorin

394

429

-8.16%

Gardasil

390

356

9.55%

Nasonex

385

368

4.62%

Isentress

362

382

-5.24%

Singulair

337

347

-2.88%

Proquad, MMR II, Varivax

272

268

1.49%

Animal Health

840

872

-3.67%

Total Consumer Care

571

579

-1.38%

Other Revenues

369

251

47.01%

Total Revenues

10,671

11,105

-3.91%


Sources: ISI Group; Bloomberg ; First Order Analytics.
 
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