Merck Slips Amid Warning About Zocor

The company affirms its full-year earnings outlook but trims the estimate for sales of its top-selling drug.
Publish date:

Updated from 3:50 p.m. EDT

Shares of


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shed more than 3% Monday after the pharmaceutical giant posted a rise in second-quarter profit but cut sales guidance for its Zocor cholesterol drug.

The company reported net income of $1.87 billion, or 83 cents a share, for the three months ended June 30, missing analysts' estimates by a penny, according to Thomson First Call. Net income was up 7% from $1.75 billion for the same period last year, while EPS was up 8% from 77 cents. Revenue rose 4% to $13.28 billion from $12.81 billion for the Whitehouse Station, N.J., company.

Merck lowered its year-end revenue guidance slightly for two big products -- Zocor, its top-selling product, and Vioxx, its arthritis and pain medication. It raised its year-end revenue guidance for other major products -- Cozaar and Hyzaar for high blood pressure, and Fosamax for osteoporosis.

The company affirmed its guidance of full-year 2003 earnings in the range of $3.40 to $3.47 a share. For the third quarter, the company said the EPS growth rate would be "generally consistent" with the growth in the first half, which was 7%. Thomas First Call's consensus is $3.41 for the full year.

"Overall, we think the quarter was OK, not great," said Jami Rubin, a drug industry analyst for Morgan Stanley, in a research note to clients filed after Merck conducted a morning conference call for analysts. "Importantly, there were no major changes to management's guidance of $3.40 to $3.47."

Rubin, who doesn't own Merck shares, rates the stock as overweight, pointing out that Merck trades at a 15% discount to its peers. Morgan Stanley has had an investment banking relationship with Merck in the last 12 months and expects to continue this relationship within the next three months.

Merck's sales were adversely affected by $405 million in wholesaler buyouts -- more commonly called "channel stuffing" -- in which wholesalers load up on a product in anticipation of price increases. Merck referred to the practice as wholesalers' placing "some noncancelable orders at prices that remain until Merck ships the product." The company said estimated wholesaler inventory levels remain "within a range customary for Merck products, in the aggregate."

The company added that its performance was aided by a lower tax rate, a favorable foreign exchange rate and an investment portfolio that benefited from low interest rates.

Merck noted in its Monday announcement that its EPS calculations continue to include both its core pharmaceutical business and Medco Health Solutions, its pharmaceutical benefits management subsidiary. Earlier this year, Merck's board of directors approved a spinoff of Medco, and in late May, the company filed a registration statement with the

Securities and Exchange Commission

signaling that Merck would complete the spinoff through a pro rata distribution of Medco Health stock.

The company had predicted the spinoff would be realized in the third quarter of 2003, and Merck affirmed its timing and plans on Monday. Until the spinoff is completed, Merck will issue financial guidance that includes Medco.

The company raised full-year sales estimates on Cozaar and Hyzaar by $100 million to a range of $2.5 billion to $2.7 billion, and it raised estimates for Fosamax by $100 million to a range of $2.7 billion to $2.9 billion.

But it lowered guidance on Zocor by $200 million to a range of $5.4 billion to $5.7 billion. Zocor is the company's top-selling drug and competes with


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And Merck cut its guidance for its Vioxx and Arcoxia drugs for arthritis and pain by $100 million to a range of $2.5 billion to $2.7 billion.

U.S. prescriptions of Vioxx dropped 7% in the second quarter vs. the same period last year. Merck blamed the decline in part on a U.S. price increase in June. The higher price "is expected to have an unfavorable impact" on wholesaler purchases for the rest of the year, the company warned.

One indicator of the significance in Vioxx's prescription decline will come Friday when Pfizer issues its second-quarter results and reveals information about Celebrex, a member of the same class of drugs as Vioxx.

Merck also reported that second-quarter sales for Zetia, a cholesterol drug developed in cooperation with Schering-Plough, advanced to $123 million, nearly triple the sales in the first quarter of 2003. Zetia became available in the U.S. in November. Still, Merck said its collaboration with Schering-Plough won't be profitable this year due to the costs of the product launch and joint venture spending with Schering-Plough.

Merck's core pharmaceutical business, excluding Medco, recorded an 8% gain in net income in the second quarter to $1.78 billion from $1.66 billion for the same period last year, and a 7% increase in revenue to $5.53 billion from $5.16 billion. On a standalone basis, Medco scratched out a 1% gain in net income to $105.2 million from $104.6 million. Revenue was virtually unchanged at $8.4 billion.

Merck's stock ended down $1.95, or 3.16%, at $59.82 on Monday, after falling as low as $59.28.