Merck & Co Inc (MRK.N) reported a surprising drop in quarterly sales of diabetes medicine Januvia, its biggest product and a frequent driver of quarterly earnings, and the drugmaker cut its full-year profit forecast on Wednesday.
Shares of Merck (MRK.N) fell 1.6 percent to $46.23. Although its profit beat forecasts for the quarter, this was due largely to a favorable tax rate, and investors were concerned about slower growth for Januvia and whether Merck could bring promising new drugs to market soon.
"This was an inflection point for Januvia," said Morningstar analyst Damien Conover. "The drug is maturing and will see significant but slower growth over the next few years as the market gets more competitive."
In lowering its profit outlook, Merck cited "pressures on sales that are greater than previously anticipated," including the stronger dollar, new research programs and higher taxes.
"The weakness of Merck's quarter can only be regarded as a clarion call for management and investors," Citibank analyst Andrew Baum said in a research note. He said Merck must manage costs, its drug portfolio and investors' expectations more carefully.
Merck reported first-quarter net income of $1.59 billion, or 52 cents per share, compared with $1.74 billion, or 56 cents per share, in the year-earlier period, when it took $1.6 billion in acquisition and restructuring charges.
Excluding these and other special items in the latest quarter, Merck earned 85 cents per share. Analysts on average were expecting 79 cents, according to Thomson Reuters I/B/E/S.
Sales fell 9 percent to $10.7 billion, below the $11.09 billion Wall Street was expecting.
Sales of Januvia, the company's fastest-growing medicine since it was approved in 2006, fell 4 percent to $884 million. Sales of Janumet, a pill which combines Januvia with the diabetes treatment metformin, rose 4 percent to $409 million. Combined sales of the medicines fell 1 percent to $1.3 billion. By contrast, both drugs had sales gains of more than 15 percent in the prior quarter.
Merck said their combined sales fell 5 percent in the United States, where about $70 million worth of wholesaler inventories of Januvia were drawn down to a two-year low, thereby lessening the need for purchases.
The company said Januvia's U.S. sales this year would grow at a mid-single-digit percentage range and increase in the low double digits in the rest of the world.
STOCK BUYBACK 'BAND-AID'
Merck said its board had authorized additional purchases of up to $15 billion of its common stock and that it would buy back about $7.5 billion over the next 12 months.
"The $15 billion share repurchase program announcement is a positive for investors, but doesn't address poor recent research and development productivity and may be viewed as a temporary Band-Aid to cover a worrying decline in the growth of Januvia," Jefferies & Co analyst Jeffrey Holford said.
The company said it expected full-year earnings of $3.45 to $3.55 per share, excluding special items. That is below the $3.60 to $3.70 it had forecast in February.
Despite the challenges, Chief Executive Officer Kenneth Frazier said Merck's fundamentals remained strong.
"We think the second half of this year will be a better indicator of the strength of our business," he said on a conference call with analysts.
Sales of asthma drug Singulair plunged 75 percent to $337 million in the quarter. The pill was Merck's biggest product, with annual sales of $6 billion, before cheaper generics flooded the U.S. market last August.
More pain from generics is in store. Merck's Maxalt migraine drug recently lost patent protection and its Temodar brain cancer medicine will soon face cheaper copycats.
Merck aims to seek marketing approval this year for a handful of new drugs, including a sleep aid called suvorexant now before U.S. regulators. It is counting on these products to help offset plunging sales of Singulair, Maxalt and Temodar.
But success of the drugs is far from assured, and Merck has had several disappointments in recent months. In January, a cholesterol fighter called Tredaptive failed to prevent heart problems in clinical trials and raised safety concerns. It was recalled in Europe following those findings.
The following month, Merck said it would delay until next year a U.S. marketing application for osteoporosis treatment odanacatib.
Merck's animal health business posted sales of $840 million, a 2 percent gain, while sales of the company's array of consumer care products rose 3 percent to $571 million.
(Reporting by Ransdell Pierson; Editing by Michele Gershberg and Lisa Von Ahn)