Why This Pharma Giant Doesn't Look Good Now

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Pharmaceutical companies in the U.S. are not having it easy these days. When Johnson & Johnson reported its latest numbers recently, it suffered from currency headwinds. Last week, Merck (NYSE: MRK) announced its first-quarter earnings, managing to beat analyst estimates. Is it stronger than the rest? Or is it in the same boat? Let's find out.

Going down

In the previous quarter, Merck's global sales amounted to $10.7 billion, 9% below last year's figure. Net income declined from $1.7 billion in the previous year to $1.6 billion in the quarter. As a result, earnings fell by $0.04 to $0.52 per share. The company's numbers suffered due to expiry of a few patents, currency changes, and weak sales. In particular, Merck's anti-diabetic drug, JANUVIA, suffered from poor sales, affecting revenue.

Asian medicine

The worst performing department at Merck was Pharmaceutical, which saw revenue decline 12% from the previous year to $8.9 billion in the quarter. The saving grace was performance in the the emerging markets, which are proving to be an important market for Merck. In the last quarter, the region contributed approximately 21% to total pharmaceutical sales for the company. Sales in the region witnessed 6% year-on-year growth. The most prominent driver of growth was China.

In the future, Merck is planning to further strengthen its presence in the China & Asia-Pacific region. The company plans to open a plant in Hangzhou, China, for manufacturing and packaging pharmaceuticals. The importance of China in Merck's global growth as a healthcare company is underlined by the fact that the country witnessed a 23% year-on-year sales growth in the last quarter. Over the next five years, Merck plans to invest over $1.5 billion in the country for R&D.

Deals and stuff

In the last quarter, Merck has made headway in a variety of areas, including the announcement of a new share buyback plan. The company entered into a deal involving commercialization of biosimilars with Samsung Bioepis in February this year.

Last week, the company entered into an agreement with Pfizer (NYSE: PFE) for collaborative development of ertugliflozin, an SGLT2 inhibitor used for the treatment for Type II diabetes. According to the terms of the deal, Merck and Pfizer will have a 60/40 share in revenue and costs. So far, Pfizer has received $60 million from Merck as part of the deal. Merck already has a presence in Type II diabetes therapy. JANUVIA, the company's largest selling drug, belongs to a class of medicine called DPP-4 inhibitors for diabetes.

The deal with Pfizer allows the companies to market ertugliflozin as a stand-alone product as well as in combination with JANUVIA. The combination of the two drugs is sure to bring in a lot of profit for the companies. While for Merck, it will mean expansion of its JANUVIA franchise, Pfizer will benefit from JANUVIA's established presence in the market. If the clinical trials go well, both the companies stand to gain a lot from the agreement.

A lot hinging on this one..

Another highlight in Merck's previous quarter was its agreement with Bristol-Myers Squibb (NYSE: BMY) involving a Phase II clinical trial to study the efficiency of a combination regimen of drugs to treat hepatitis C virus (HCV). The regimen includes Bristol-Myers' daclatasvir and Merck's MK-5172. Bristol-Myers has been in the race for developing an efficient HCV therapy for some time now. Earlier this year, the company had to pay over $1.8 billion after clinical trial of its inhibitor 094 proved that it was dangerous.

If the clinical trial with Merck proves successful, Bristol-Myers will be able to undo the damage caused earlier. The company sure has a lot riding on this deal. For 2013, Bristol-Myers expects its earnings per share to be in the range of $1.54-$1.64 per share. At the lower end of the range, this will mean a 33% jump from last year's earnings of $1.16 per share.

What to expect

While Merck may have a lot of deals, agreements, and expansion plans for the next few quarters, the company's prospects for growth do not look very strong at the moment. For the full year ahead, Merck expects its earnings to be between $1.92 and $2.16 per share. At the lower end, this will be an 11% fall from last year's earnings per share of $2.16.

The company's sales growth has been negligible over the last three years. Plus, the company's pharmaceutical sales have been falling, mainly owing to expiring patents. Merck's bestseller asthma drug, SINGULAIR, lost its patent in 2012, affecting sales dramatically in the previous quarter. If the downward trend in pharma sales continues, Merck will have little else to fall back on. Moreover, Merck's investment into R&D has been falling, a red flag for the times to come. Until the company comes up with a breakthrough drug or its sales pick up, I would want to stay away from this pharma giant.

Can Merck beat the patent cliff?
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