Updated from 7:55 a.m. ESTMerck ( MRK) released fourth-quarter earnings that beat Wall Street's estimates, as sales held steady while restructuring and legal costs were slightly lower in the latest period. The drugmaker also issued 2006 guidance that was in line with analysts' predictions. Merck's sliding financial performance could hit its nadir this year, thanks to the continuing impact of patent expirations on big products, as well as the continuing uncertainty over Vioxx litigation. Beyond this year, Merck's progress will depend on how well new drugs perform, how many experimental compounds make it to the market, how effectively Merck makes licensing deals or acquisitions and how juries react to Vioxx. Merck took a $295 million charge in the fourth quarter, adding to the litigation reserve for the arthritis drug that it withdrew from the market in September 2004 for safety reasons. Already, Merck has spent $285 million to defend Vioxx cases. The reserve now stands at $685 million. As of Dec. 31, Merck was the defendant in 9,650 U.S. personal injury suits and 190 class-action suits alleging personal injuries or economic losses. Despite its Vioxx woes, Merck reported fourth-quarter earnings of 64 cents a share, excluding one-time items. That topped by 2 cents the consensus estimate of analysts polled by Thomson First Call. Calculated by generally accepted accounting principles, Merck earned $1.12 billion, or 51 cents a share, compared with $1.10 billion, or 50 cents a share, for the same period last year. Sales were $5.77 billion in the latest quarter, compared with $5.75 billion a year ago. For the full year, Merck's earnings per share of $2.53, before items, was 2 cents better than the analyst average. By midday, Merck's stock was up 12 cents to $34.58. Richard T. Clark, the CEO, said the fourth-quarter and full-year performance "serves as a platform for the future." He says the company can deliver "double-digit compound earnings growth ... over the next three to five years" when restructuring charges are excluded. Earnings per share, excluding restructuring charges, should resume growing in 2007, he says.
For the first quarter, Merck expects to earn 62 cents to 66 cents a share before restructuring charges. Analysts were forecasting 64 cents a share. Merck also reaffirmed its full-year EPS target of $2.28 to $2.36, excluding items. Analysts were calling for $2.33 a share. "The risk to the shares is the Vioxx liability," says Barbara Ryan of Deutsche Bank Securities, in a Tuesday research note. "However, shareholders are currently being compensated with a 5%-plus dividend yield, which is secure." Ryan says her buy rating is based in part on Merck's
previously announced "aggressive but achievable strategic plan" that includes cutting costs, closing some plants and focusing research and development efforts. The company has "a new sense of urgency and accountability," says Ryan, who doesn't own shares and whose firm doesn't have an investment-banking relationship with Merck. Merck enters 2006, knowing that its best-selling drug, Zocor, will lose its U.S patent by midyear. The cholesterol drug has been losing patent protection in foreign markets, which played a role in an 18% drop for fourth-quarter 2005 sales to $1.07 billion. For all of 2005, Zocor produced $4.38 billion in sales, down 16% from 2004. The Fosamax family of osteoporosis drugs recorded worldwide sales of $3.19 billion last year, up 1% from 2004, but fourth-quarter sales were down 5% to $789 million as generic competition overseas took its toll. Last year, the asthma medication Singulair gained 13% to $2.98 billion, and sales of the Cozaar/Hyzaar hypertension drugs gained 8% to $3.04 billion. Merck also derives income from several joint ventures. The biggest is its deal with Schering-Plough ( SGP) to market two cholesterol drugs. One is for Zetia, made by Schering-Plough, and the other is Vytorin, which combines Zetia and Zocor. Merck said the joint venture's net sales -- it doesn't identify sales or profit for each company -- was $2.43 billion last year, or double the $1.19 billion in 2004.
Tim Anderson of Prudential Equity Group says the last three months of 2005 represented a "good quarter overall," but he is keeping a neutral rating. The most immediate risk, aside from the Vioxx litigation, is the potential impact of new generic cholesterol drugs chewing into sales of Vytorin this year, he says. Anderson doesn't own shares, and his firm doesn't have an investment-banking relationship. Judy Lewent, Merck's chief financial officer, says the company is talking to more than 40 companies in an effort to establish business alliances. Merck also is examining "a range of targeted acquisitions," she says. Clark says Merck hasn't incorporated potential acquisitions into its revenue and earnings projections. Clark's ideal target would be a biotechnology company that has products on the market and whose research focuses on compounds that Merck recently outlined as its top priorities. Anticipating analysts' questions, Lewent says Merck has the financial strength to maintain the quarterly dividend at its current level as well as to finance R&D priorities.