Merck Worth $41 Shows Solid Growth And Cost Controls

Merck (NYSE:MRK) declared its results for the first quarter on 27th April. A lot happened during this quarter that can potentially impact the company’s ongoing business. During the quarter, it reported uniform growth across all segments with better cost control and gains from certain non-recurring items ensured net earnings jump of nearly 67% from $1.07 billion to $1.77 billion. The noteworthy non-recurring items were $500 million gain related to resolution of the arbitration proceedings with J&J (NYSE:JNJ) and $134 million gain on sale of certain manufacturing assets. If we analyze the results excluding the non-recurring items and restructuring costs, the results are still encouraging with almost 9.1% growth in earnings compared to same period last year.

Merck operates in 4 segments namely, pharmaceutical, animal health, consumer care and alliance segment and competes with other healthcare companies like Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ) and Abbott Labs (NYSE:ABT).

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Sound Growth & New FDA Approvals in 2012: Isentress, Janumet, Zioptan

Isentress sales increased from $292 million to $337 million in Q1 2012, showing a growth rate of 15%. In January 2012, Merck got FDA approval for Isentress for use in children older than 2 years for HIV therapy. Isentress is a drug for HIV and the company reports its revenues as part of anti-infectives segment. It is a very important drug for Merck, given that it earned revenues of $1.4 billion in 2011 and showed historical growth rates of 25% and 45% in 2011 and 2010, respectively. With this approval, we expect Isentress to be a major source of prospective revenues for Merck and will cause an improvement in market share in that segment. The anti-infectives segment contributes over 25% to the company value.

Janumet sales increased from $305 million to $392 million in Q1 2012, showing nearly 29% growth. In February 2012, Janumet got FDA approval for use in type 2 diabetes. It is a once-daily treatment to control blood sugar. This will help Merck strengthen its already formidable position in Alimentary and metabolism drugs segment, which contributes nearly almost 20% to the company value. We expect Merck to gain market share in this segment going forward.

Zioptan, a drug prescribed for ophthalmic symptoms received FDA nod for use in cases of ocular hypertension. Ocular hypertension is a condition characterized by an increase in pressure inside the eye. Merck recently also ventured into developing medication for ovarian cancer through a partnership with Endocyte.

As a result of some of the better performing drugs like Januvia, Janumet, Isentress and Gardasil and maintained growth of established drugs like Singulair, Merck registered a 3% growth in pharmaceuticals from $9.8 billion to $10.1 billion. However, the results were adjusted to exclude sales of Remicade and Simponi from the units transferred to Johnson & Johnson as a result of the arbitration settlement agreement.

Trends Observed During Q1: Better Cost Control

The company saw a sizable reduction in costs relating to marketing and administrative that fell nearly 3% from $3.16 billion to $3.07 billion and research and development fell almost 14% from $2.2 billion to $1.9 billion. This resulted in improved margins and can be considered in line with the expectations of subdued growth in future because of EU healthcare austerity.

Concerns This Year

Patent expiration has been a matter of concern for all the healthcare companies and for Merck, and 2012 will be no better because of its patent expiration of Singulair in August 2012. Singulair has been a block buster drug for asthma and brought sales of nearly $5.5 billion in 2011. This will impact Merck’s market share in respiratory drugs segment.

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