Merck’s Q2 Earnings Preview: What We Are Watching

Merck (NYSE:MRK) is set to declare its second quarter results on Friday, July 27. Excluding the currency impact, we expect the company to report uniform growth across all 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. Merck operates in four segments: pharmaceutical, animal health, consumer care, and alliance.

We are in the process of updating our model and revising our $41 price estimate for Merck to reflect the recent developments.

Check out our complete analysis of Merck

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 Singulair and Nasonex. The company has received approval for extended use of many of its major drugs during the last nine 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.

However, 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 the growth. Further, 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 the emerging markets.

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.

Short Term Concerns Offset by Long Term Prospects

Patent expiration has been a matter of concern for the healthcare companies including Merck, and 2012 will be no better because of the company’s patent expiration of Singulair in August 2012, even as only less than 20% of the company’s 2011 revenues are subject to generic competition over the next two years. Singulair has been a block buster drug for asthma and brought in sales of nearly $5.5 billion in 2011. Further, the company lost a patent infringement lawsuit against Apotex over the latter’s plan to launch a generic version of Nasonex.

However, the company recently closed trials for osteoporosis drug Odanacatib early after the release of encouraging data and is well on track to receive approval for the drug. The drug could bring in more than a billion dollar each year to Merck’s kitty. Insomnia drug Suvorexant could become the potential blockbuster drug. In addition, the company has several Phase II and III trials under discussion and, given its past record of rolling out ground-breaking medications, we wouldn’t rule out Merck launching successful drugs in the future.

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