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Merck (NYSE:MRK) reported its first quarter of 2012 earnings with limited fanfare and no surprise. The company is continuing to face a new chapter in its history due to expiring patents. I wanted to take a look at what is new with Merck and some of its competitors during this earnings season.

It seems, with its numerous trials, a $4.5 billion settlement, and a $950 million fine, that Merck has permanently put to bed the disaster of its "miracle" painkilling drug, Vioxx. Or, as a recent article points out, maybe things are not actually over quite yet. In any event, the entire Vioxx scenario was an utter nightmare for a company whose very business depends essentially on user and physician trust.

Revenues for the company in the first quarter of 2012 came in at $11.7 billion, a 1% gain from last year's first quarter, and also about $100 million short of analysts' expectations. Earnings, after allowing for one-time events, came to $3.04 billion or $0.99 per share, an 8% gain from last year, and a penny per share over expectations. The earnings growth was courtesy of firm expense control. If the one-time costs of acquisitions and restructurings had been included in the earnings number, earnings would have been $0.56 per share.

The lifeblood of any pharmaceutical company is its research pipeline. None more so than Merck, whose biggest true blockbuster, Singulair, comes off patent this year. Singulair sales, which came to $1.34 billion in the quarter, will be difficult to replace, if that revenue can be replaced all. Singulair loss of patent protection follows multibillion dollar blockbusters Fosamax in 2008, and Cozaar in 2010. Merck currently has several, somewhat smaller albeit successful medications on the market not in imminent risk for patent expiration that are experiencing solid year-over-year growth. Chief among those is Januvia, a diabetes medication, whose sales of $919 million in the first quarter of 2012 were 24% higher than in the year earlier. Janumet also has entered true blockbuster status, with sales in the recent quarter of $392 million, up 29% from a year earlier.

In the last several years, Merck has bought other companies for their pipelines, as well as continuing to invest in its own. Since 2009, Merck bought Schering Plough in 2009 for $41 billion, Millipore in 2010 for $7.2 billion, and in 2011 purchased Inspire Pharmaceuticals for $430 million, among other acquisitions. It is often cheaper to buy companies with product and pipeline intact than it is to develop one's own new drug, the cost of which is about $1 billion.

Internally, Merck has had some good news from its pipeline, and some bad news. Merck had put a lot of faith in a combination anti-cholesterol drug, which in March the FDA refused to license. However, there are many quality new medications at various stages of development, and if nothing else, Merck has shown an ability to recover from the loss of profitable medicines. One other bit of good news from this month is that to no one's surprise, Merck prevailed over generic manufacturer Mylan (NASDAQ:MYL) and obtained a judgment that Merck's patents protecting Vytorin and Zetia were valid through 2017.

Merck pays a generous 4.4% yield, and its balance sheet is still very strong. It carries a very low beta of 0.3, and should appeal to conservative, income oriented investors. To those of us interested in growth, I really don't see Merck doing any better than the overall market.

Johnson & Johnson (NYSE:JNJ) is another global pharmaceutical and healthcare company. Its consumer products division manufactures and sells everything from baby shampoos to Visine. In its first quarter of 2012, Johnson reported earnings of $3.9 billion, or $1.41 per share. After taking out one-time factors earnings fall to $3.8 billion, or $1.37 per share. This was one penny below expectations, but up a little over 1% from last year's first quarter. Revenues came in at $16.1 billion, down less than 1% from last year.

JNJ is enjoying substantial growth in its overseas units. Overall, revenues in the United States in the first quarter of 2012 fell by 5% to $7.22 billion. International sales rose by 4% to $8.92 billion, but absent unfavorable currency movements would have raised by over 6%.

For all that JNJ has going for it, such as worldwide scope, tremendous brand names, and a 49 year record of consecutive dividend increases, what JNJ does not have is any well-defined growth prospects. JNJ's earnings growth has averaged only 3.6% annually the past five years, and forecasts are for 5.87% average growth the next five years. Even with JNJ's quality, 3.5% yield, such lackluster growth prospects do not allow me to endorse this stock.

So, after looking at two low growth behemoths, what would I want to invest in within the pharmaceutical sector? I would first take a good long look at Cubist (CBST), a 20 year old Massachusetts company focused on acute care medicinal treatment. It has averaged 21% profit growth the past five years, and maintained that momentum in the first quarter of 2012. Revenues were up 30% from the year ago quarter to $212 million, and profits after omitting one-time factors rose 61% to $66 million, or $0.82 per diluted share.

Over 90% of Cubist's revenues are from its blockbuster Cubisin, used in hospital settings for exotic infections. As a bioengineered drug, it does not face the same patent limitations as face the makers of chemically derived drugs. Cubist also has a handful of medications in second and third tier trials. If any of these match Cubisin's level, Cubist's sales, profits, and valuation will skyrocket. Even if not, Cubisin is just now catching on in overseas market and has plenty of growth yet in store.

Analysts see Cubist's profits rising 18% per year over the next five years. There is every chance the company may grow its profits far greater than that already heady clip. The company has over $800 million cash on its balance sheet, and about $450 million in debt. To those interested in a drug stock and adventurous enough to take a road less traveled, give Cubist a look.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 2 Low-Growth Pharma Behemoths: Merck, J&J