The pharmaceutical business is facing difficult times, as many blockbuster drugs lose their patent protection and face generic competition. Drugmaker Merck
With several of its future blockbusters still warming up, the year-end financial results Merck released yesterday were, as expected, nothing spectacular. Yearly sales rose a measly 3%, and earnings for the year fell 4%. Excluding certain one-time items, earnings per share were flat compared to 2005, at $2.52 per share. Despite the earnings decline, Merck reiterated its guidance for a double-digit compounded annual growth rate in earnings per share to 2010. That said, its estimate for adjusted 2007 earnings per share is hardly exciting, with a midpoint of $2.55.
Merck may have missed double-digit earnings growth this year and last, but its future looks brighter, thanks to introduction of its Gardasil vaccine and Januvia diabetes treatments. Gardasil sales jumped more than 120% sequentially to $155 million in the fourth quarter, while Januvia debuted with $42 million in sales. These products' sales gains will help Merck overcome the loss of patent protection on some of its blockbusters; Zocor lost patent protection last year, and Fosamax loses protection next year.
In other good news, Merck's Vioxx litigation wins continued this quarter. The trials cost the company a whopping $500 million in 2006, but Merck's record now stands at 23 wins (including dismissed and withdrawn cases), only four losses, and two unresolved mistrials. If my Sacramento Kings' win percentage were even half this good, I'd be happy.
Obviously, some of these court cases are subject to appeals, but Merck appears to be winning here. They may have been pyrrhic victories, though; the reserve for future legal costs has ballooned to almost $900 million.
If Merck doesn't suffer a string of Vioxx setbacks, and if it can hit its long-term goal for double-digit compounded annual earnings per share growth without relying too heavily on share buybacks, then its shares are nicely valued today. Merck's dividend yield, one of the best among major drugmakers, is just icing on the cake.