Merck Earnings Preview: What We Are Watching

by Trefis Team
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Merck (NYSE:MRK) is set to declare its Q4 2012 results this Friday, and we expect the drug maker to report a decline in revenues and profits. The patent expiration of Singulair will hurt growth in the pharmaceutical segment even as animal and consumer healthcare franchises will continue to post strong growth. The strengthening of the U.S. dollar will also negatively impact the earnings. For the quarter, we expect gross margins to remain under pressure.

Below we take a detailed look at the important factors that will impact the company’s business divisions.

Check out our complete analysis of Merck

Revenues, Margins To Decline

Growth in the pharmaceutical division will largely be hurt by the loss of U.S. patent exclusivity of Singulair, an asthma drug, in August 2012. The drug was one of largest block buster drug in the company’s portfolio and brought in sales of nearly $5.5 billion in 2011. When the patent for a drug expires, competition from cheaper generic products developed by competitors inevitably eats into these businesses. This leads to a significant drop in sales for that drug because of the entry of cheap generic versions. This was clearly evident from a significant decline in its prescriptions after the drug’s patent expiry (Read Merck Updates: Singulair Prescriptions See A Steep Decline Post-Patent Expiry).

We, however, expect continued strong performance by several drugs like Januvia, Janumet, Isentress and Gardasil, which should partially fend off revenue losses from patent expiries. Merck has received the approval for the extended use of many of these drugs during 2012. In January 2012, the FDA approved Isentress for use in children older than 2 years for HIV therapy. In February 2012, Janumet, a once-daily treatment to control blood sugar, got the FDA approval for use in type 2 diabetes.

In addition, a stronger U.S. dollar could weaken the earnings to some extent as Merck gets more than 50% of its sales from international markets. Despite price cuts in 2012, volume growth should increase sales from Japan. We expect 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.

The animal health business, part of its legacy pharma, animal & consumer health division in our model, is also expected to post moderate growth as sales for cattle and swine products remained strong during the period. However, lower third-party manufacturing sales including from AstraZeneca LP will offset the growth in the consumer healthcare business.

A change of product mix and patent expiry of Singulair could put pressure on gross margins, and higher R&D spending from ongoing clinical trials and various deals announced will impact results as well.

What Else To Look For?

We will be closely watching the earnings announcement for any clues on big ticket acquisitions. Merck is said to be showing interest in private equity firm Warburg Pincus’ large eye-care business Bausch & Lomb (Read Merck, Abbott And JNJ Show Interest In Bausch & Lomb).

Further, we expect additional cost cutting measures being announced during the earnings as the drug maker will continue to grapple with patent expiries in 2013. While Singulair sales will continue to decline in 2013, Merck’s Temodar and Propecia, which collectively bring around $1 billion in sales, are also going to see more competition from generics in the coming year.

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