Merck & Co., Inc. Earnings: Is Growth Around the Corner?

The drugmaker has seen patent-cliff woes, but could earnings start climbing again?

Apr 28, 2014 at 6:30PM

On Tuesday, Merck (NYSE:MRK) will release its quarterly report, and investors have sent the stock soaring to multiyear highs recently. Even though Merck's revenue and earnings aren't likely to grow from year-ago levels, Merck is showing promise in its ability to stand up to Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ), and other pharma rivals in its development pipeline. Even though impressive clinical trial results won't produce an immediate impact to Merck's financial statements, Merck's efforts in research and development will be what creates tomorrow's blockbuster drug candidates.

Merck has a history as a stalwart of the pharma space, and that has made some growth-oriented investors focused more on up-and-coming biotechs as having more upside potential. Yet in promising areas like hepatitis C and cancer, Merck has made progress in establishing itself as a force to be reckoned with among its competitors. Let's take an early look at what's been happening with Merck over the past quarter and what we're likely to see in its report.

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Source: Steven Depolo, Flickr.

Stats on Merck

Analyst EPS Estimate

$0.79

Change From Year-Ago EPS

(7.1%)

Revenue Estimate

$10.44 billion

Change From Year-Ago Revenue

(2.2%)

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Which way will Merck earnings move this quarter?
In recent months, analysts have trimmed their views on Merck earnings, cutting first-quarter estimates by $0.04 per share and reducing their longer-term 2014 and 2015 projections by the same amount. The stock, though, has soared higher, rising 12% since late January.

Merck's fourth-quarter earnings report showed the challenges that the pharma giant has faced in recent years. Revenue fell 3.4%, sending net income dropping 14%. The patent expiration of asthma drug Singulair has had the biggest impact on Merck's financials recently, and so far, Merck hasn't been able to replace Singulair's success with new drug candidates. That's a similar story to what Pfizer has seen lately, although Johnson & Johnson has thus far done a better job of avoiding patent cliff-related revenue declines and has seen its sales continue to rise.

Mrk Vaccine

Source: Merck.

Still, Merck is looking increasingly impressive in several key areas of its pipeline. In hepatitis C, Merck's combination MK-5172 and MK-8742 therapy for genotype 1 has recently exploded on the scene, and although it's only in phase 2 trials, many analysts believe that the combination could eventually pose a threat to better-established rivals in the hep C area. Moreover, its cancer-fighting MK-3475 therapy has gotten a lot of attention from the pharma industry, with Pfizer and other peers partnering with Merck to run clinical trials combining MK-3475 with other drugs. As Merck ramps up its pipeline activity, it's clear the company wants new blockbusters to boost overall sales.

At the same time, though, Merck has to defend its turf on some of its more successful remaining drugs. In the diabetes realm, Januvia and Janumet have seen substantial growth and continue to bring billions of dollars in annual revenue into Merck's coffers. Yet competitors are seeking to come up with diabetes drugs of their own, forcing Merck to conduct its own research into new potential diabetes drugs like ertugliflozin and omarigliptin in order to protect its position in the space. Similarly, in cholesterol treatments, Merck's Zetia could be under threat from biotech competition, as late-stage clinical studies have shown competing drugs with superior results in reducing cholesterol.

In the Merck earnings report, watch to see whether the company elaborates on the impact of the Affordable Care Act on its business. Already, Merck has stopped a popular program that helped reimburse patients for insurance copayments, citing the possibility that such measures violate terms of Obamacare. With many investors worried about the changing state of health care in America, Merck needs to make sure it's ahead of the curve in addressing those changes if it wants to start growing again.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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