Merck & Co Inc (MRK.N) reported better-than-expected quarterly earnings on strong sales of vaccines and treatments for diabetes and HIV, giving investors greater faith the company can weather looming generic competition for its flagship Singulair asthma drug.
The No. 2 U.S. drugmaker, whose shares were up 3.4 percent after touching a 52-week high, on Friday also attributed the second-quarter profit beat to a $260 million decline in marketing and administrative expenses.
The company is girding for the U.S. patent expiration next month on its biggest product, $5 billion-a-year Singulair, which will open the floodgates to cheaper generics. Analysts expect the pill to swiftly lose as much as two-thirds of its sales and hurt Merck's results for the rest of the year and well into 2013.
Adding to the pain, the company's Maxalt migraine drug, with $600 million in annual sales, goes generic in December, followed by generic competition next year for its Temodar brain cancer medicine, which has near-blockbuster sales of $900 million.
Merck is counting on its respected pipeline of experimental drugs to come through and help offset the vanishing Singulair sales. Over the next 18 months, it aims to seek six drug approvals, including marketing applications for new types of therapies for insomnia and osteoporosis.
ISI Group analyst Mark Schoenebaum said quarterly results were "very good," driven by surprisingly strong sales.
"But this really isn't an earnings story, (but) more of an emerging pipeline story against the backdrop of low investor expectations," he wrote in a research note.
Morningstar analyst Damien Conover said the coming wave of new Merck drugs should spark the beginnings of a profit rebound in 2014, just as diabetes drug Januvia and other new medicines allowed Merck to bounce back from earlier patent expirations on big drugs like its Zocor cholesterol fighter and Fosamax osteoporosis treatment.
"Previous rebounds remind folks that Merck has a very innovative pipeline and the ability to bring new products to market," Conover said. "And its resiliency will allow it to get through the Singulair patent cliff."
Merck's research spending rose 12 percent in the quarter, to $2.17 billion, as it completes costly late-stage trials of new drugs.
Company Chief Executive Kenneth Frazier, in a conference call with analysts, said the company has significantly trimmed its research budget since 2009, but is willing to boost spending when warranted.
"At the end of the day, research and development spending should be a function ... of specific products we have in the pipeline," he said.
Merck said it had earned $1.79 billion, or 58 cents per share, in the second quarter, compared with $2.02 billion, or 65 cents per share, a year earlier.
Excluding special items, the company earned $1.05 per share. Analysts on average expected $1.01.
Sales rose 1 percent to $12.31 billion, topping estimates of $12.15 billion. They would have risen 5 percent if not for the stronger dollar, which lowers the value of sales in overseas markets.
Despite the negative impact of foreign exchange, Merck affirmed its full-year earnings forecast of $3.75 to $3.85 per share, excluding special items. That compares with last year's profit of $3.77.
Singulair sales rose 6 percent in the quarter to $1.43 billion. Sales of Januvia, Merck's fastest-growing product in the past few years, soared 36 percent to $1.06 billion, while a related treatment called Janumet rose 28 percent to $411 million.
Sales of HIV treatment Isentress rose 18 percent to $398 million. But sales of blood pressure treatment Cozaar, which recently lost patent protection, tumbled 17 percent to $337 million.
Merck shares were up 3.4 percent at $44.79 on Friday morning, after touching a 52-week high of $44.95 earlier in the session. The shares have risen 27 percent in the past year, helped by layoffs and cost cuts following Merck's acquisition in late 2009 of U.S. rival Schering-Plough. During the past year, the ARCA Pharmaceutical Index .DRG of large U.S. and European drugmakers has risen 10 percent.
(Reporting by Ransdell Pierson in New York; Editing by Gerald E. McCormick, Jeffrey Benkoe, Lisa Von Ahn and Matthew Lewis)