Will Merck Make It?

Given all that's happened to Merck (NYSE: MRK) over the last few months, you'd think that investors would have been ecstatic about the company reaffirming its 2008 guidance yesterday. Instead, the market just shrugged.

The company only mustered a 1% year-over-year growth in sales, but that's to be expected given the 37% decrease in sales of blockbuster osteoporosis drug Fosamax after it lost patent protection earlier this year. Unlike Pfizer (NYSE: PFE), which can't seem to cover its generic-competition shortfall, Merck is at least keeping pace. In fact, the brands that haven't lost patent protection performed quite nicely, managing a combined 12% increase in U.S. sales.

After the Enhance data was released and Merck and Schering-Plough (NYSE: SGP) got clobbered at the American College of Cardiology meeting, all eyes were really focused on how sales of cholesterol drugs Zetia and Vytorin did in the past quarter. The answer? Sales were up 6% over the first quarter last year, which, while not bad, pales in comparison to the 34% year-over-year increase that the cholesterol drugs managed in the pre-Enhance fourth quarter. In fact, all the growth was outside the U.S.; sales of both drugs were down year over year in the States.

Adding the small Schering gain onto the other joint ventures, like its vaccine partnership with Sanofi-Aventis (NYSE: SNY), resulted in a 13% year-over-year gain in income from joint ventures. That income, combined with a little cost-cutting, helped Merck turn that aforementioned 1% increase in sales into an almost 6% gain in adjusted earnings per share after subtracting out restructuring charges, as well as the $1.4 billion after-tax distribution from AstraZeneca (NYSE: AZN) as the companies slowly dissolve their partnership.

Merck thinks it should still be able to make its previous earnings-per-share guidance, although the company is shifting regarding where it expects to make the money from. The weak dollar should help boost international sales a little, while the company lowered expected sales to AstraZeneca by $200 million and lowered its expected income from its partnerships by $700 million, thanks to the lower sales of cholesterol drugs.

Merck had a decent quarter and will most likely have an OK year. But the market's failure to be impressed with the company making its own guidance is likely because its initial forecasts tend to be conservative. The market isn't impressed with companies that just make their back-up plan.