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You can sum up Merck's (NYSE: MRK ) third quarter in three words: These things happen.
Sales were down 4% year over year in the third quarter, but the strengthening of the dollar caused a drop in reported revenue outside the U.S. At constant currency, sales were flat year over year.
Obviously, no growth isn't acceptable in the long term, but in the short term, it's understandable. Merck's top-selling drug, Singulair, started competing with generic competition in the third quarter, which caused an immediate 55% decrease in sales of the drug.
Merck was able to counter that drop with strong sales of other drugs. HPV vaccine Gardasil and HIV drug Isnetress both posted double-digit growth, and sales of diabetes drug Januvia and its sister, Janumet, were up 15% and 16%, respectively.
The combined Januvia/Janumet franchise had higher sales in the most recent quarter than Singulair did last year before the generic competition set in. It's truly amazing that they're both still experiencing double-digit growth in the face of competition from diabetes drugs sold by Bristol-Myers Squibb (NYSE: BMY ) , AstraZeneca (NYSE: AZN ) , Novo Nordisk (NYSE: NVO ) , and many others.
Merck was able to turn the 4% decline in revenue into a slight increase in income. Some of the difference had to do with lowering expenses, but most of the increase could be traced back to a lower tax rate: 20.5% in the most recent quarter versus 26.7% in the year-ago quarter.
So to recap, we've got currency changes and loss of Singulair exclusivity hurting the company, and lower taxes helping it. The thing is, those are all one-time issues. This time next year, we probably won't be talking about the currency changes unless they flip around and drive revenue higher, year-over-year comparisons for Singulair will be easier, and who knows whether Merck will be able to keep its taxes down.
If you ignore all that and look at the core business, Merck's other products look strong, and it has a nice pipeline of drugs to grow revenue further. Investors willing to look through the noise and wait for Singulair comparisons to normalize can collect a solid 3.6% dividend yield now, which could increase if Merck bumps its dividend next month.
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