Merck Q1 net income triples on lower costs

Merck & Co. on Friday said its first-quarter profit more than tripled as strong sales of key drugs and lower costs from integrating its Schering-Plough acquisition offset competition from generic drugs that slashed sales of two heart drugs.

The results beat Wall Street expectations and suggest drug sales and cost savings from acquiring Schering-Plough Inc. are starting to pay off.


Merck shares rose 24 cents to $36.01 in morning trading.

The maker of Singulair for asthma and allergies and Januvia for diabetes said net income was $1.04 billion, or 34 cents per share, up from $299 million, or 9 cents a share, in 2010's first quarter.


Revenue edged up 1 percent to $11.58 billion. That includes several billion dollars from products acquired when Merck bought Schering-Plough Corp. in November 2009 for $49 billion.

Excluding numerous one-time items, net income was $2.86 billion, or 92 cents per share.

Analysts forecast earnings per share of 84 cents and revenue of $11.38 billion. Analysts typically exclude one-time items in their estimates.

The $1.82 billion in net charges included $1.58 billion in merger-related writedowns on the value of assets and research, $126 million in restructuring costs and a $500 million payment to settle arbitration with Johnson & Johnson over rights to two drugs. A year ago, Merck had charges totaling $2.31 billion.


Merck, based in Whitehouse Station, N.J., raised the bottom end of its 2011 profit forecast by 2 cents, predicting $3.66 to $3.76 per share, or $2.04 to $2.39 per share including one-time charges.

"We're very much committed to growth and we think we're off to a terrific start in the first quarter," CEO Kenneth Frazier told analysts during a conference call. "The steps we are taking are paying off."

Frazier noted the company got double-digit sales growth from key products, "combined with deliberate cost control measures across all areas of the company as we continue to create a more effective and efficient operating model."

Production costs fell 22 percent to $4.06 billion, partly because Merck has sold some of the two companies' factories.

Jeffries & Co. analyst Ian Hilliker wrote to investors that the higher revenue and lower-than-expected costs gave Merck a strong "earnings beat."

Edward Jones analyst Linda Bannister said Merck's strong quarter and expected cost savings from the Schering-Plough acquisition should enable Merck to overcome future drug patent losses and "provide an opportunity for the company to raise its dividend once again."

It's now 38 cents a share. Merck this week announced a new $5 billion share buyback.

Top-performing drugs included Singulair and Januvia, plus some drugs acquired with Schering: allergy spray Nasonex and Remicade for immune disorders. Their growth was partly offset by a $356 million drop in revenue from former blockbuster heart drugs Cozaar and Hyzaar caused by generic competition.


Januvia and Janumet, a pill that combines Januvia with generic diabetes drug metformin, had combined quarterly sales that topped $1 billion for the first time, up 47 percent.

Total pharmaceutical revenue rose 2 percent to $9.82 billion. Two divisions Merck acquired with Schering, animal health and consumer health, also performed well. Animal health revenue rose 7 percent and consumer health 6 percent, on strong sales of Claritin allergy pills and Coppertone sun care products.

Merck received U.S. approval two weeks ago for Sylatron, the first new complementary therapy for the deadly skin cancer melanoma in this country in 15 years. It's for use soon after tumor-removal surgery in patients whose melanoma has spread only to nearby lymph nodes.

The company has five experimental drugs under review by regulators in the U.S. and European Union. Those are Victrelis for hepatitis C, an extended-release form of Janumet, a pill combining Januvia with Merck's now-generic cholesterol drug Zocor, a new oral contraceptive called Nomac-E2 and an eye drug.

Frazier said feedback from doctors at a recent European conference of liver specialists indicates enthusiasm for Victrelis, which is expected to be approved and launched this spring. Current hepatitis C therapy takes 6 months or more, causes flu-like side effects and fails to cure roughly a third of patients.

Frazier noted the recent settlement of the two-year arbitration case with J&J, over rights J&J had shared with Schering for foreign sales of Remicade and new successor drug Simponi "resolved a major area of uncertainty whle retaining approximately 70 percent of our 2010 revenue from these products."