Merck Earnings Slip

Updated from 9:11 a.m, EDT

Merck's ( MRK) first-quarter earnings slipped from a year ago on slightly lower-than-expected revenue, but the drug giant's net income was a penny ahead of estimates and it guided second-quarter earnings higher.

Merck earned $1.62 billion, or 73 cents a share, in the first quarter compared with earnings of $1.71 billion, or 76 cents a share, last year. The year-ago quarter had $165 million of net income from discontinued operations; excluding that, first-quarter 2004 earnings rose 5% over last year and first-quarter per-share earnings rose 7%. Revenue rose 1% to $5.63 billion.

Analysts surveyed by Thomson First Call were forecasting earnings of 72 cents a share on revenue of $5.74 billion in the latest quarter. Merck guided its second quarter higher, saying it expects to earn 78 cents to 82 cents a share in the period, compared with the existing analyst consensus of 77 cents. The company also reaffirmed its full-year EPS guidance of $3.11 to $3.17. The Wall Street consensus is $3.13.

Recently, Merck's stock was down 45 cents, or 1%, to $46.05.

Merck said it was on track in its efforts to eliminate 4,400 jobs worldwide, noting that 3,800 of the employee dismissals have taken place through March 31. The job-reduction plan was announced in October; the cuts will be completed by year-end.

"With revenues soft and key franchises under pressure, we maintain our in-line rating," said James Kelly, of Goldman Sachs, in a brief Thursday research note to clients. The pressure is being exerted on the cholesterol drug Zocor, the osteoporosis treatment Fosamax and the arthritis/pain medication Vioxx. Kelly is one of 22 analysts tracked by Thomson First Call with a neutral view of the company. (He doesn't own shares; his firm has had an investment banking relationship with Merck in the last 12 months.)

Another neutral opinion was offered by Barbara Ryan, of Deutsche Bank Securities. She reiterated her concerns about sales trends for Zocor and Vioxx and about the company's ability to market new, strong-selling drugs before the current best-sellers weaken due to competition from brand name medications and/or generics.

She told clients she expects earnings growth to be in the "low- to mid-single-digit range over the next few years." She is forecasting full-year EPS of $3.11, which represents a 6.1% gain over 2003."We prefer more attractive alternatives, especially Pfizer ( PFE), which has a higher EPS growth rate at only a slightly higher multiple." (Ryan doesn't own shares in Merck; her firms says it expects to seek or receive investment banking compensation from Merck in the next three months.)

Among its major product categories, Merck said Thursday that Zocor's first-quarter sales totaled $1.3 billion; Fosamax's first-quarter sales totaled $759 million; and high blood pressure treatments Cozaar and Hyzaar's first-quarter sales totaled $629 million.

The company also offered full-year guidance for some of its best-selling drugs, which Merck said will be the key players in 2004. Sales for some drugs, however, will be flat or even slightly down from 2003.

Merck said Zocor would produce worldwide sales of $4.9 billion to $5.1 billion. Last year, Zocor had sales of $5.01 billion. The flattening -- or even shrinking -- of sales reflects the fact that Zocor is starting to lose patent protection in some foreign markets. Zocor loses U.S. patent protection in 2006. Also, it is unclear how much Zocor's sales will be affected by Vytorin, the cholesterol drug that combines Zocor with Zetia, made by Schering-Plough ( SGP). Vytorin, comarketed by the companies, is still under review by the Food and Drug Administration. Schering-Plough said Thursday that it expects Vytorin to be launched in the United States during the second half of 2004. Germany and Mexico recently approved Vytorin.

The asthma and allergy drug Singulair should produce sales of $2.4 billion to $2.7 billion this year, up from $2 billion last year.

The Cozaar/Hyzaar hypertension drugs are predicted to have sales of $2.7 billion to $2.9 billion, up from $2.49 billion in 2003.

And Fosamax is expected to remain in the range of last year's sales of $2.68 billion. For 2004, Merck is looking for sales of $2.7 billion to $2.9 billion.

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