Will Merck Earnings Bounce Back Tomorrow?

Merck (MRK 1.03%) is scheduled to release its quarterly earnings report tomorrow, and most investors expect the company to see continued reductions in its overall net income compared to year-ago levels. Yet the stock has performed quite well lately, suggesting that in the long run, Merck earnings could well return to their winning ways, helping to support a dividend yield that puts the drugmaker in the upper echelon of dividend stocks within the Dow Jones Industrials (^DJI 0.56%).

Like many of its drugmaker peers, Merck has struggled as major blockbuster products have gone off patent, forcing it to try to find replacement drugs to keep its overall sales and profit up. So far, Merck has only had mixed success in accomplishing that difficult task, but some promising prospects could help the company get past its patent-cliff woes and get back to strong growth. 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 quarterly report.

Stats on Merck

Source: Yahoo! Finance.

How will Merck's earnings start growing again?
In recent months, analysts have been increasingly pessimistic about Merck's earnings, cutting their June-quarter estimates by $0.08 per share and reducing full-year 2013 consensus figures by almost double that amount. Yet the stock hasn't suffered from those cuts, managing to eke out a 2% gain since late April.

Merck's first-quarter results reveal a lot of the problems that the company has faced lately. Overall revenue declined 9% due largely to the fact that asthma drug Singulair went off patent during the past year and therefore now faces generic competition. Yet even more troubling than the predictable Singulair sales losses was the fact that diabetes blockbuster Januvia saw weaker sales in the first quarter, even though its patent protection continues unabated. Januvia faces new competition from Johnson & Johnson (JNJ 1.18%) and its Invokana treatment for type 2 diabetes. With studies showing that Invokana topped Januvia in terms of performance, a shift away from Januvia could pose an unexpected new threat to Merck's earnings while providing a nice boost to J&J's own bottom line.

Merck also suffered a setback in its pipeline when its insomnia treatment suvorexant was rejected by the FDA. The rejection cited concerns about Merck's proposals to move patients gradually up to higher dosages of the drug, with the FDA suggesting lower-dosage treatment that will require new manufacturing studies that could delay the release of the drug by a year or more.

Yet Merck still has plenty of pipeline potential. With treatments for osteoporosis, hepatitis C, and atherosclerosis showing varying degrees of promise, Merck has a number of drugs with multibillion-dollar potential if it can push them through the approval process. In particular, analysts believe the market for osteoporosis drugs from rival Amgen and bone-therapy drugs could generate $3 billion in peak sales, and if Merck's odanacatib can muscle in on even a portion of those sales opportunities, it could be huge for the company's long-term prospects.

In tomorrow's Merck earnings report, look closely at the breakdown of the company's various drug franchises and how much revenue growth they're each producing. In particular, if Januvia continues to struggle, it'll put even more pressure on Merck to find ways to get its best candidates through the development pipeline as efficiently as possible.

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