Merck's Risky Cost Cutting Move

NEW YORK (TheStreet) -- When good earnings come about as the result of cost cuts, exhilaration is woefully misplaced. That goes double when the cost cuts come from a substantial area of the company's operations.

Enter

Merck

(MRK) - Get Report

. The company reported earnings this morning and though revenues came in lame and light, EPS (after items) ran two pennies ahead of expectations. Problem is, the earnings beat came on the backs of cuts to their research budget.

Going forward, this is an essential issue. A drug company cutting its research budget to ribbons is not the same as closing an extra warehouse or two or firing some extra layer of bureaucrats. Research is their lifeblood. Less research money has undeniably wide and lasting implications.

But too much of the media either downplay the trims, fail to mention that they are specifically coming from research or, in the curious case of Fox Business, ignore the cost cuts altogether.

With the headline "Merck profit beats as research trimmed," Reuters does it up right. This is the central takeaway you need from Merck's earnings "beat." Long-term, it might result in future Merck earnings taking a beating. Ignore it--as too much of the media did--at your own risk.