Merck Fares Well Despite Currency Impact

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Merck

Merck (NYSE:MRK) announced its quarterly earnings for Q2 2012 last Friday, in which it reported a marginal jump in revenues, in-line with our expectations. The company recorded $12.31 billion in sales, up 1% y-o-y. The strengthening of the U.S. Dollar weighed heavily on the growth even as total sales grew 5%, excluding the currency impact. Pharmaceutical and animal franchise continued to show strong performance. As expected, net income (excluding non-recurring items) grew by 9% to $3.2 billion mainly due to the company’s cost-cutting efforts.

Check out our complete analysis of Merck

Earnings at a Glance

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In line with our expectations, Januvia, Janumet, Isentress and Gardasil were the major growth drivers for the pharmaceuticals division as they witnessed double digit growth. 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.

The company’s largest selling drug Singulair also fared well with nearly 5% growth.  Growth in sales was partially offset by a decline in Remicade and Simponi as some marketing rights were transferred to Johnson & Johnson following an arbitration settlement agreement. The loss of marketing exclusivity for Cozaar and Hyzaar in 2010 also kept growth in check. Overall pharmaceutical sales grew by a robust 5%, excluding a 3% currency impact.

Sales from emerging markets accounted for nearly 18% of total pharmaceutical sales in the second quarter with China leading international growth by an impressive 27%. European austerity, however, remained a concern for the company. Januvia and Isentress were the major drivers for international sales growth.

Animal health business, part of Legacy Pharma, Animal & Cons. Health division in our model, grew by 14% y-o-y, excluding a 6% negative impact on foreign exchange. Sales were strong, particularly in the U.S. and Asia Pacific, on cattle and swine products. However, lower revenues of 27% from AstraZeneca LP (AZLP) as well as lower third-party manufacturing sales offset much of the growth.

On the operational front, we saw an improvement in margins due to a reduction in marketing and administrative costs. R&D expenditure grew by 12% as the company continued to keep its R&D spending intact to fend off patent cliffs in the next two years.

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

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