Merck (NYSE: MRK ) beat analysts' earnings expectations in the second quarter, but it's hard to get excited about decreasing costs and lower taxes especially considering the risks the drugmaker faces.
Revenue growth? Now that would pique my interest, but it didn't happen this quarter. Technically, revenue grew 92%, but that's just because the acquisition of Schering-Plough didn't occur until the fourth quarter of last year. Comparing the two companies as if they were one last year, sales actually decreased 1.6%.
The culprits were the usual suspects: Patent exclusivity was lost on blood pressure medications Cozaar and Hyzaar; HPV vaccine Gardasil dropped under competition from GlaxoSmithKline's (NYSE: GSK ) Cervarix; and sales of Zostavax, the company's vaccine for shingles, continues to be limited by manufacturing issues.
Merck has some drugs that are growing nicely -- the Januvia franchise and HIV treatment Isentress, in particular -- but their growth wasn't enough to counteract the problem children.
The second half of the year isn't going to get any easier for Merck. Despite the bottom-line beat, the drugmaker merely narrowed the range of its 2010 adjusted earnings guidance, lowering the top and increasing the bottom of the range.
That guidance includes issues like pricing pressure in Europe, but it doesn't factor in the potential loss of Remicade. Johnson & Johnson (NYSE: JNJ ) claims the merger of Merck and Schering-Plough allows the company to take back the rights to Remicade, which Schering sold outside the U.S. The loss of Remicade at an arbitration hearing in September would be devastating considering that sales outside the U.S. have already topped $1 billion this year, and the drug is still growing, up 24% in the first half of the year.
Trading at about 10.5 times expected earnings for the year, Merck isn't at the oh-my-gosh-that's-cheap level. Like Pfizer (NYSE: PFE ) , Merck has the risk of integration slowing down drug development, plus it has the potential loss of Remicade. Investors should wait to see how those play out before getting excited about this one.
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