Merck: Ready To Jump Higher In Q4

| About: Merck & (MRK)

Merck (NYSE:MRK) has reported better than expected results for the third quarter of 2012. Global sales were $11.5 billion for the quarter, a decrease of 4 percent over the same quarter of the previous year. Excluding the adverse impact of unfavorable foreign exchange rates, sales were roughly in line with the third quarter of 2011. Strong growth in key products offset the negative impact of the August 2012 loss of market exclusivity for Singulair (montelukast sodium) in the United States. Third-quarter pharmaceutical sales declined 5% to $9.9 billion, including a 5% negative impact due to adverse foreign exchange rates. Strong sales growth for Gardasil [Human Papillomavirus Quadrivalent (Types 6, 11, 16 and 18) Vaccine, Recombinant], Januvia (sitagliptin), Victrelis (boceprevir), Zostavax (zoster vaccine live), Isentress (raltegravir), and Janumet (sitagliptin/metformin hydrochloride) helped in offsetting the expected declines in sales of Singulair , Cozaar (losartan potassium) and Hyzaar (losartan potassium and hydrochlorothiazide). Sales in emerging markets accounted for roughly 20 percent of pharmaceutical sales in the third quarter. Sales growth in the emerging markets was primarily due to primary care and women's health, vaccines, hospital and specialty, and diversified brands. China continues to be a key market with 19 percent growth for the third quarter, including a 1 percent benefit from foreign exchange.

Worldwide sales of the combined diabetes franchise of Januvia/Janumet (medicines that help to lower blood sugar levels in adults with type 2 diabetes) grew 15 percent to $1.4 billion in the first quarter primarily because of growth in the United States and Japan. Sales of Zetia (ezetimibe) and Vytorin (ezetimibe/simvastatin) (medicines for lowering LDL cholesterol) declined 1 percent to $1.1 billion in this quarter and lower sales of Vytorin were partially offset by growth of Zetia in the United States. Worldwide sales of Singulair, a once-a-day oral medicine for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis, shrank by $734 million, or 55 percent, to $602 million. The patent for Singulair expired in the United States on August 3rd, 2012 and will expire in major European markets in February 2013. As a result, there has been a significant and rapid decline in sales in the United States and a similar decline is expected in Europe following patent expiry. SINGULAIR continues to retain marketing exclusivity in Japan until 2016.

GAAP EPS was $.56 a share compared to $.55 a share in the same quarter of the previous year. Non-GAAP EPS (excluding acquisition-related costs and restructuring costs) was $.95 a share compared to $.94 a share year on year. GAAP net income was $1.729 billion for the quarter compared to $1.692 billion for the same quarter in the previous year and non-GAAP net income was $2.932 billion and $2.908 billion respectively. For the full year 2012, the company expects a GAAP EPS of $2.08 to $2.24 and a non-GAAP EPS of $3.78 to $3.82. The consensus estimate is a non-GAAP EPS of $3.81 a share. For the third quarter, consensus estimate of analysts were $11.6 billion in revenues and non-GAAP EPS of $.93 a share.

The company also provided some updates. It has entered into an exclusive worldwide licensing agreement for AiCuris' late-stage antiviral candidate for the treatment and prevention of human cytomegalovirus infection in transplant recipients; it has completed a study of sugammadex, a neuromuscular blocker reversal agent, to assess bleeding risk when co-administered with anticoagulants in a surgical setting and remains on track to resubmit sugammadex to the FDA this year. Results from a Phase 2 trial for odanacatib, an investigational cathepsin K inhibitor in development for the treatment of osteoporosis in post-menopausal women show that it has significantly increased bone mineral density over a two-year period in patients previously treated with alendronate. It has announced plans to file applications for vorapaxar, an investigational anti-thrombotic medicine, in the United States and Europe in 2013. The company will seek an indication for the prevention of cardiovascular events in patients with a history of heart attack and no history of transient ischemic attack or stroke.

Late stage results for its insomnia drug Suvorexant, in June, revealed that the therapy enhanced the ability of patients to fall and then stay asleep. The drug works differently from the other drugs on the market because it targets and blocks the neurotransmitter orexin, which regulates wakefulness In other words, this means that the drug works on the patient without sedation and therefore has a better safety profile. It is estimated that between 70 million and 80 million people in the US suffer from insomnia and only 20% use sleeping pills. Merck expects revenues of $800 million annually by 2016. The other promising drug is osteoporosis drug Odanacatib where the mid-stage trial showed that hip and spine bone mineral density increased significantly among post-menopausal women with osteoporosis. The osteoporosis market is dominated by Roche's (OTCQX:RHHBY) Bonviva/Boniva and Novartis's (NYSE:NVS) Aclasta/Zometa. The global market for osteoporosis is expected to be over $11 billion by the year 2015 growing at more than 9% annually.

The stock is currently trading at a trailing P/E ratio of around 21. Abbott (NYSE:ABT) currently has a PE near 16 but suffered a major blow to its pipeline with the discontinuation of Beacon's phase 3 study because of safety concern Eli Lilly (NYSE:LLY) currently has a PE ratio of approximately 14 but suffered from declining revenues. On the other hand, Merck has handled its patent cliff problems most impressively as its third-quarter performance shows. It has an extremely strong pipeline of 20 drugs in late stage trials and should have no problem in maintaining strong growth. Not only can you look forward to capital appreciation generated by this growth but the pie is sweetened by an attractive dividend yield of around 3.7%. Merck is currently trading around $46.15, but I think it will sustain price levels around $48 by late this year. If you are looking for a healthcare investment, I strongly recommend Merck.

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.

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