Merck: Current Investors Should Hold This Pharma Long-Term

| About: Merck & (MRK)

Merck (NYSE:MRK) provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. On October 26th, Merck reported mixed third quarter earnings. The company reported revenues of $11.5 billion, which was a 4.3% decrease from revenues of $12 billion in the third quarter of 2011. Net income was $1.73 billion compared to net income of $1.69 billion in the third quarter of 2011. Earnings per share came in at $0.56 compared to earnings per share of $0.55 in the third quarter of 2011. Consensus analyst estimates called for revenues of $11.57 billion. Investors showed little excitement after Merck's earnings announcement as the stock price dipped by 0.32% on just above average trading volume.

The pharmaceutical division had revenues of $9.9 billion which was 5% lower on a year-over-year basis. The animal health division had revenues of $815 million which was a 1% year over year decrease. The consumer care division had revenues of $451 million which was a 7% year-over-year increase. During the conference call, Merck changed its 2012 earnings guidance to $3.78 to $3.82 per share from a prior range of $3.75 to $3.85 per share.

The company's net revenues were down because its blockbuster drug Singular lost its U.S. patent exclusivity. Year-over-year sales of Singular dropped by 55% to $602 million from $1.33 billion. The Singular patent is due to expire in Europe in February of 2013 and in Japan in 2016.

The company has done a good job of building its drug pipeline, and it has six new drugs that should help to replace the revenues that will be lost as a result of Singular's patent expiration. The six new drugs are Odanacatib which treats osteoporosis, Suvorexant which treat insomnia, Sugammadex which treats adjudicated hypersensitivity, Vintafolide which treats various cancers, Tredaptive, a novel cholesterol medicine, and V503 which prevents HPV associated cancers. Each of these drug treatments could generate significant revenues once they are marketed.

Despite the lower revenues, Merck has several drugs whose third quarter sales were significantly higher on a year-over-year basis. Those drugs included Januvia, which had third quarter sales of $975 million and whose sales were up by 15%; Gardasil which had third quarter sales of $581 million and whose sales were up 31%; Janumet which had third quarter sales of $405 million and whose sales were up 16%; and Issentress which had third quarter sales of $399 million and whose sale were up 16%.

Recent News of Merck & Company Inc.

On October 26th, it was announced that osteoporosis drug odanacatib significantly increased hip and spine bone mineral density in a phase two trial of post-menopausal women who had previously taken the company's Fosamax treatment. "Odanacatib may be a viable alternative for patients who need continued therapy and who want benefits beyond what they (already) received," Merck said.

On October 9th, it was announced that Merck intends to move its HQ from Whitehouse Station in New Jersey to an existing location in Summit, which is also in the state. The Summit facility houses research, manufacturing, animal health, and consumer care operations and is home to 1,800 employees. The move is part of Merck's program to consolidate its property assets and cut costs.

On October 8th, it was announced that Merck is licensing the experimental skin-patch vaccination developed by Australia's Vaxxas to further fund research, including human tests, Vaxxas says. The Nanopatch system could protect against disease with only a small percentage of antigens required in needle-based vaccination and might be cheaply manufactured and even mailed out in case of a flu pandemic.

On October 3rd, it was announced that Merck gives a ray hope to its dwindling pipeline, after saying that Phase 2b studies of MK-3102, its investigational once-weekly treatment for Type 2 diabetes, significantly lowered blood sugar when compared with a placebo. The pharmaceutical giant presented the data at the annual meeting of the European Association for the Study of Diabetes in Berlin, noting the results were very encouraging and it plans to begin Phase 3 studies very soon.

On October 2nd, it was announced that Merck's Gardasil vaccine for preventing cervical cancer was found to be safe in a massive study of the short-term effects of the drug. The report was the second in the past year showing that Gardasil causes no immediate side effects, although concerns exist about the long-term impact. The vaccine generated $1.2B in revenues.

Conclusion

I think that Merck has done an excellent job of developing new drug treatments which can replace the revenues that it will lose as a result of patent expirations. In just the last month, the company has gotten good news about two of its newly developed drugs Odanacatib and Gardasil. The company has also gotten positive earnings results from its top selling drugs Januvia and Gardasil.

Even though Merck's stock did not move higher on the date of its third quarter announcement, its 52 week performance (+34%) has been impressive. Stocks in the pharmaceutical sector have done well and Merck's stock performance has been close to that of its two top competitors. Over the last 52 weeks, Eli Lilly's (NYSE:LLY) stock price has increased by 35%, and Pfizer's (NYSE:PFE) stock price has increased by 32%. I consider Merck, Pfizer, and Eli Lilly to be the best of breed companies in the pharmaceutical sector. I think that these are strong companies with safe dividends, that could be good long-term investments. But after the recent run up in their stock prices, I do not expect that any of them will see any significant near-term capital appreciation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.