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Merck: Too Early to Tell on First-Quarter Earnings Outlook

Its fourth quarter comes in as expected.

Updated from 8:10 a.m. EST



Tuesday met fourth-quarter earnings estimates and reaffirmed full-year 2004 guidance. But the company was mum on first-quarter guidance, saying, "the patterns for 2004 will be affected by the patterns of 2003."

The nation's second-largest drugmaker earned $1.39 billion, or 62 cents a share, from continuing operations, compared with $1.81 billion, or 80 cents a share, a year ago. Revenue fell to $5.6 billion from $6.1 billion last year.

The Thomson First Call consensus estimate of analysts was 62 cents a share.

The company said it wouldn't estimate first-quarter earnings, preferring to take it "one quarter at a time." By mid-February, however, Merck hopes to have a forecast. Analysts have projected a profit of 73 cents a share.

"As we get through each quarter and get a sense of where these products are, we will be able to tighten up guidance," Merck said on a postearnings conference call.

One analyst was undaunted. "With restructuring costs, inventory drawdowns, a depleted late-stage pipeline and possible product sales shortfalls -- both Zocor and Vioxx are vulnerable, in our estimation -- we

still believe that Merck will be unable to maintain relevant growth," wrote Deutsche Bank analyst Barbara Ryan in a research note.

The New Jersey-based drugmaker held to its full-year 2004 earnings forecast of $3.11 to $3.17 a share, which bookends the consensus estimate of $3.13 a share.

Merck's results follow a period of diminished expectations for the company, which has seen its share price slump in the past year. Shares rose about 3% Monday, closing at $47.20, down sharply from their 52-week high of $63.50. They were currently up 28 cents, or 0.6%, at $47.48.

Fourth-quarter earnings reflect charges to correct that reversal of fortune. The company cited $175 million in restructuring costs covering layoffs and another $700 million to $750 million for the launch of a new wholesaler distribution program.

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In October 2003, Merck said it would cut 4,400 positions, and by Dec. 31, 3,200 positions had been eliminated. The company also expects additional restructuring costs in 2004 of approximately $75 million to $125 million. Merck said the measures are expected to generate annual savings of $250 million to $300 million starting in 2005.

The company said in the conference call that it is pleased with the results of the new wholesaler distribution program, implemented during the fourth quarter, as inventory levels are down. Merck hopes inventory on hand at its wholesalers will be less than a month's worth, compared with as much as two months' worth at times in the past.

"We will provide wholesalers an opportunity to earn incentives by controlling levels of inventory, maintaining them, and ensuring the right level of customer service," the company said, adding that wholesalers will report to Merck on a regular basis.

"We took significant steps in 2003 to drive long-term growth," the company said in a release. "We reduced our cost structure and continue to look for additional savings and efficiencies. We improved the way we distribute products to our U.S. wholesalers. We spun off Medco Health, and we strengthened our position in Japan. These actions should position Merck well for the future."

In addition, the company said sales of Nexium increased while sales of Prilosec declined. Both are drugs to treat heartburn. The company expects payments of both drugs to remain unchanged from 2003 levels in 2004, compared with an initial expectation of a 15% to 20% drop initially provided on

Dec. 3.

The company said its cholesterol absorption inhibitor Zetia, which is joint-mmarketed with



, became the leading nonstatin during the quarter, with a 5% market share in new prescription sales. Outside the U.S., the product launched in Holland and Canada and further launches are expected in Europe in 2004.

Additionally, on Dec. 30, 2003, Merck submitted a new drug approval for Arcoxia, its newest once-daily pain medication, to the Food and Drug Administration. The company also is studying a DP-IV inhibitor, a glucose-lowering mechanism for the treatment of Type II diabetes. Merck plans to enter phase III clinical trials with this investigational compound in the second quarter of 2004 and expects to submit to the FDA in 2006.

Merck's early-stage pipeline includes candidates in diabetes, obesity, Alzheimer's disease, respiratory disease, coronary heart disease, rheumatoid arthritis and vaccines.

The company also said it expects to file three major vaccine trials with the FDA. The candidate vaccines for human papillomavirus (HPV) and shingles will be submitted in 2005, while Rotateq, a vaccine for rotavirus-induced infant diarrhea, is expected to be filed in the second quarter of 2004.