Merck: Earnings Preview

Merck (MRK: 36.88 0.00 0.00%) is scheduled to report its fourth quarter and 2009 results on Feb 16. The Zacks Consensus Estimate for the quarter and full year is pegged at a profit of 78 cents and $3.27 per share, respectively. Earnings estimates for the fourth quarter and 2009 have moved down over the past 30 days as 4 out of the 14 analysts lowered their estimates. In contrast, only 2 analysts raised their expectations.

Going by the past trend, Merck has consistently surpassed expectations. Merck had a positive surprise of 9.76% and 6.41% in the third and second quarters of fiscal 2009, respectively, with the positive four-quarter average of 7.5%. This means that, on an average, the company topped the Zacks Consensus Estimate by 7.5% over the last four quarters.

For 2010, the current Zacks Consensus Estimate is $3.46 per share, representing an approximate growth of 5.8%. However, we witness a clear negative trend with respect to estimate revisions for 2010. Seven of the 17 analysts covering the stock have reduced their estimates over the past 30 days while only 1 analyst revised upward. We believe the loss of patent exclusivity of two of Merck’s key drugs has prompted the analysts to lower estimates.

Merck’s hypertension franchise, Cozaar (losartan potassium) and Hyzaar (Cozaar and hydrochlorothiazide), that generated sales of $3.6 billion are slated to lose their patent in the U.S. and some of the major European markets in the first half of 2010. Subsequently, sales are expected to plunge. These drugs accounted for more than 14% of total revenues.

In addition, Merck is suffering from lower sales of one of the most significant products in its portfolio, Gardasil – the cervical cancer vaccine. Although Gardasil (approved for the age group of 9-26 years) sales ramped very quickly following its launch, sales have struggled recently due to difficulty in penetrating older patients. Moreover, the combined sales of Merck’s cholesterol lowering drug, Zetia and Vytorin are also under pressure.

We believe Merck’s merger with Schering-Plough will be able to address certain impending patent cliffs and pipeline failures. Given the minimal product overlap and relative ease in combining the cholesterol business we would expect significant synergistic opportunities from combining sales, marketing, research and other back-office functions. The deal should also help diversify revenue sources geographically. 

We have a Neutral recommendation on the stock