Earnings Preview: Merck report comes after drug OK

Merck & Co., which reports its first-quarter results before the stock market opens Friday, likely will discuss its just-approved skin cancer drug, a big litigation settlement and how it will address another round of generic competition.

WHAT TO WATCH FOR: The world's second-biggest drugmaker by revenue, thanks to its acquisition of Schering-Plough Corp., faces a big revenue hit from generic competition.


Its top seller, Singulair for asthma and allergies, loses patent protection in August 2012. That's after blockbuster blood pressure drugs Cozaar and Hyzaar got generic competition a year ago. Those three drugs had brought in a total of nearly $9 billion a year.

Two smaller sellers, baldness treatment Propecia and HIV drug Crixivan, also lose patent protection in the next couple years.


Given that, Kenneth Frazier, who was promoted to CEO on Jan. 1, will talk about Merck's plans to increase both revenue and profit. He may give an update on ongoing cost-cutting and will discuss plans to launch the new skin cancer drug, the status of a few drugs likely to be approved this year and the latest news on other experimental drugs in the pipeline, such as anacetrapib for hardening of the arteries.

Two weeks ago, the company got U.S. approval for a new drug for melanoma, the most deadly skin cancer. Sylatron is approved for use as an additional therapy soon after tumor-removal surgery in patients whose melanoma has only spread to nearby lymph nodes. Merck says it's the first additional, or adjuvant, therapy for melanoma approved in this country in 15 years.

On Wednesday, a Food and Drug Administration advisory panel recommended approving Merck's experimental drug for hepatitis C drug boceprevir, which has also received expedited reviews from regulators in the European Union. Approval to sell the drug in this country under its new brand name, Victrelis, is anticipated in May. Like a rival drug from Vertex Pharmaceuticals and partner Johnson & Johnson that also could get approval soon, boceprevir is more effective than older drugs on the market for two decades.

Whitehouse Station, N.J.-based Merck also is awaiting approval from the Food and Drug Administration for a new pill to treat two disorders that often go together, Type 2 diabetes and lipid disorders. Those include high levels of bad cholesterol, low levels of good cholesterol and high levels of another blood fat called triglycerides. The medicine combines Merck's blockbuster diabetes pill Januvia and its older, now-generic cholesterol medicine Zocor.


An FDA decision is expected in the second half of the year on an extended-release version of Janumet, which combines Januvia with a more widely used generic diabetes drug, metformin.

Meanwhile, Merck removed one big cloud with an April 15 agreement with Johnson & Johnson to end two years of arbitration over billions in annual revenue from two biotech drugs for immune disorders, Remicade and Simponi. Under the settlement, Merck will give J&J a one-time $500 million payment and more of the revenue, but it averted the possibility arbitrators would give it all to J&J. Merck kept rights to sell the drugs in Europe, Russia and Turkey, splitting those profits 50-50 with J&J.

Merck announced two smaller deals this month. It will buy Inspire Pharmaceuticals Inc. for about $430 million to add treatments for eye conditions, such as Azasite for pinkeye caused by bacteria. And it's forming a joint venture with India's Sun Pharmaceutical Industries Ltd. to develop and sell branded generic drugs in emerging pharmaceutical markets.

Wednesday the company's board approved a $5 billion increase in its share repurchase plan, raising the total authorization to up to $6.4 billion.

WHY IT MATTERS: Like most major drugmakers, Merck is dealing with looming generic competition from key drugs, demands for lower prices from U.S. and European government health programs, the weak global economy and the many uninsured patients.

So Merck bought Schering-Plough in November 2009 for nearly $50 billion to diversify and boost profit in the near term by slashing jobs. The deal brought Schering-Plough's experimental drugs, biotech business, consumer health products including Coppertone and Schering's animal health business, Intervet.

But last month, snags forced Merck to abandon a year-old plan to combine Intervet with Sanofi-Aventis SA's animal health business into a joint venture that would have been the world's largest maker of pet and livestock medicines. Antitrust regulators wanted the two companies to sell off some of their products, and their review was dragging on.

Overall, Credit Suisse analyst Catherine Arnold sees "superior growth with a multifaceted pipeline" at Merck, compared to its peers. She wrote investors recently that longer-term savings from the Schering-Plough acquisition have a good chance of being even higher then Merck predicted. "We also believe that a dividend increase is likely" with the J&J arbitration settled, she added.


WHAT'S EXPECTED: Analysts surveyed by FactSet forecast earnings per share of 84 cents and sales of $11.38 billion.

LAST YEAR'S QUARTER: Merck reported earnings of 9 cents per share, or 83 cents excluding charges totaling $2.31 billion, on revenue of $11.42 billion.