Merck (NYSE:MRK) is set to declare its Q3 2012 results on Friday. Excluding the currency impact, we expect the company to report marginal growth across segments. The strengthening of the U.S. dollar will negatively impact the earnings to some extent. For the quarter, we expect margins to improve slightly following the company’s cost control efforts. Below we take a detailed look at the important factors that will impact the company’s business divisions.
We expect the pharmaceutical business to continue with its stellar performance on better performing drugs like Januvia, Janumet, Isentress and Gardasil and growth from established drugs like Nasonex. Merck has received approval for extended use of many of its major drugs during the last couple of months. In January, the FDA approved Isentress for use in children older than 2 years for HIV therapy. In February, Janumet, a once-daily treatment to control blood sugar, got the FDA approval for use in type 2 diabetes. Extended usages have boosted the sales of these drugs in the last two quarters, and we expect them to continue to post strong growth.
Growth will, however, be hurt by loss of the U.S. patent exclusivity of Singulair in August, which was one of largest block buster drug in the company’s portfolio and brought in sales of nearly $5.5 billion in 2011. The drug has seen a steep decline in its prescriptions post patent expiry. (Read Merck Updates: Singulair Prescriptions See A Steep Decline Post-Patent Expiry) Further, the results will exclude the sales of Remicade and Simponi from the units transferred to Johnson & Johnson as a result of the arbitration settlement agreement, which could impact growth.
In addition, the strengthening of the U.S. dollar could dampen the earnings to a large extent as Merck gets more than 50% of its sales from international markets. We expect the sales from emerging markets (excluding currency impact) to increase its share in the company’s total revenues with China being the key growth driver in emerging markets.
Animal health business, part of its legacy pharma, animal & consumer health division in our model, is also expected to post moderate growth, excluding a negative impact on foreign exchange. Sales may get a boost from cattle and swine products. However, lower third-party manufacturing sales could offset bit of the growth.
On the operational front, we will continue to see Merck drive efficiency gains through a reduction in marketing and administrative costs and realize benefits from the Schering-Plough merger, which should lead to an improvement in margins.
The company continues to face near-term headwinds due to patents expiring as close to 20% of the company’s 2011 revenues are subject to generic competition over the next two years. However, the long-term return lies in the company’s drug pipeline which remains strong. Merck recently closed trials for osteoporosis drug Odanacatib early after release of encouraging data and is well on track to receive approval for the drug. Odanacatib could bring in more than a billion dollar each year to Merck’s coffers. Insomnia drug Suvorexant could become a potential blockbuster drug as well.
However, the stock appreciating more than 35% in the last one year has surpassed our current $43 price estimate for Merck and seems to have factored in these developments. We will soon update our price estimate to reflect the Q3 earnings.