Updated from 12:02 p.m. EDT

Merck

(MRK) - Get Report

, the second-largest

drug company in the world, reported earnings on Monday that exceeded Wall Street's expectations by 4 cents and sales that grew 18%, led by five of its drugs.

The company, based in Whitehouse Station, N.J., also said it is on track to surpass expectations for full-year 2000.

Investors were pleased by the news, as shares of Merck finished Monday regular trading up 6 1/8, or 10%, at 69 7/8. The shares are trading at a 10% discount to the

S&P 500

index, while most drug stocks are trading at a 30% premium.

For the second quarter ended June 30, net income rose to $1.7 billion, or 73 cents a diluted share, from $1.5 billion, or 61 cents a share, a year earlier. The consensus estimate of analysts polled by

First Call/Thomson Financial

was 69 cents.

Revenue rose to $9.5 billion from $8.0 billion a year ago, with pharmaceutical sales rising 18% and sales from the Merck-Medco managed care business also rising 18%. Sales of arthritis treatment Vioxx, cholesterol treatment Zocor, high blood pressure treatment Cozaar/Hyzaar, osteoporosis treatment Fosamax and asthma treatment Singulair accounting for more than 50% of Merck's worldwide sales of drugs for humans for the first six months of the year.

Those five drugs are in a "growth phase and we expect that trend to continue," said analyst Leonard Yaffe of

Banc of America Securities

. "They are well positioned for the next six quarters." He rates Merck a strong buy and his firm has done no underwriting for the company.

However, there are worries that an upcoming proliferation of expiring patents will hurt Merck's prospects. After all, $34 billion worth of drugs will go off patent between 2000 and 2005, and Merck is the most exposed to the patent expiration cycle, with it products accounting for $7 billion, or 21%, of the total.

Merck's high blood pressure treatment Vasotec goes off patent next month, but Yaffe believes that the company's five key drugs are "growing so rapidly that they will more than offset the negative growth from Vasotec. We think the company is bulletproof from now until the end of 2001."

Even after Prilosec, a proton pump inhibitor or new generation ulcer drug, goes off patent at the end of 2001, Yaffe thinks the company is secure because it has put growth mechanisms in place to combat that loss. Merck does not break down how much it makes from Prilosec royalties, but it did report that its equity income from affiliates amounted to $212 million for the quarter and Prilosec comprises most of that. (Merck receives royalties from sales Prilosec, which is manufactured by

AstraZeneca

(AZN) - Get Report

.)

Some of those growth mechanisms include an application for approval to market a once-weekly Fosamax treatment and the addition of enrolled members in the Medco business.

Merck also said it is likely to beat the full-year 2000 earnings-per-share estimate range of $2.76 to $2.81, although the "earnings growth rate for the first two quarters might be somewhat stronger than the remaining two quarters."