Earnings season's hitting top health care stocks with full force, and today marked Merck's (NYSE:MRK) big day in front of investors. Merck reported earnings before the opening bell today, and investors came away disappointed from the get-go: While the company did manage to top Wall Street's earnings estimates, its profits still nosedived by 35% for the quarter.
Generic competition's still taking a big bite out of Merck's performance, but one of the company's brightest hopes for the future has led today's drop in this blue chip stock, as shares fell around 2.5% at the opening of the trading day. Here are the three keys from Merck's earnings release that you need to know.
Januvia's ongoing disappointment
Blockbuster diabetes star Januvia holds the keys to Merck's future, but this standout drug isn't performing like a foundation of the company. Januvia, first approved in 2006, saw its sales slide 5% in the third quarter. The combination of Januvia and Janumet, its sister drug for treating diabetes, slipped 1% overall, down from a 5% growth mark a year ago.
Januvia and Janumet are still huge revenue gainers for Merck. The two drugs combined for more than $2.8 billion over the first half of the year, but in that time frame, Januvia has struggled with falling sales. Stiffening competition is rising in the diabetes market, particularly with the approval of Johnson & Johnson's (NYSE:JNJ) diabetes therapy Invokana. Invokana looks to threaten Januvia and Janumet's strong position in this market, and Johnson & Johnson's drug has performed well against the former in past clinical trials.
Johnson & Johnson's Invokana could rack up $1 billion or more in annual peak sales, and while that's far less than Januvia and Janumet bring in, Merck needs to restore growth in this drug duo to tap into the growing and lucrative diabetes market -- and to keep the company's sales on track for the future.
Mounting concerns from the patent cliff
Why is Januvia so important to Merck's future? Look no further than the patent cliff, which continues to hammer away at the company's results.
Singulair, once Merck's top-selling drug, has continued its fall from grace after losing its patent protection. The drug's sales fell 53% in the quarter, a slight bit better than the more than 75% year-over-year sales loss the drug took over the first half of the year -- although a respite that likely won't satisfy investors frustrated with Merck's weak financial performance of late.
Singulair's the big loser right now, but more patent pain's on the way for Merck. Generic versions of Zetia -- Merck's cholesterol-fighting drug that brought in more than $1.2 billion through the first half of the year -- will be clear to hit the market in December 2016. Allergy medicine Nasonex loses its formulation patent in the U.S. next year, a bad sign for a drug that made more than $700 million over the first six months of the year. Vytorin, another top cholesterol fighter, will lose patent protection in 2017 after scoring more than $800 million in revenues through that same time frame.
Januvia and Janumet were expected to help make up for these losses, but with Merck's signature diabetes duo struggling, patent losses loom much larger in the company's future. And if Singulair's current predicament is any indicator, the results won't be good for investors.
Signs of light in the dark
Even in the darkness, Merck showed some signs of life in the third quarter.
HPV vaccine Gardasil, one of Merck's stronger-selling drugs over the recent past, continues to shine brightly. Gardasil's sales jumped by 15% year-over-year to $665 million in the third quarter. That puts the drug well over the $1 billion mark in revenue for the year through nine months and continues strong growth shown through the first six months of the year.
Gardasil can't pick up all of the slack from Januvia's slowdown and patent expirations, however. It's a good thing for Merck investors that old, reliable immunology therapy Remicade continues to perform strongly. Remicade has been a wonder drug for both Merck and partner Johnson & Johnson, and the drug's sales jumped 17% in the third quarter. That's remarkable growth for one of the best-selling drugs in the world, and while Johnson & Johnson reaps most of Remicade's sales, Merck's still profiting from this therapy's timeless performance.
Don't expect Remicade to go away soon, either. While the drug's patent expires this decade, biologics like Remicade have been harder for generic drugmakers to copy in the past. Right now, Remicade looks like a strong option to keep performing well for Merck into the future.
Merck's future in doubt
Ultimately, however, Remicade, Gardasil, and other growing drugs right now don't have enough firepower to account for Januvia and Janumet's disappointing sales slowdown. Combined with the patent cliff poised to strike over the next few years (and already in full force with Singulair), Januvia and Janumet's petering out will have big consequences for investors if Merck can't turn around these top franchises.
Investors will have to wait and see whether Merck's R&D division, currently in the midst of a recently announced makeover, will be able to inject life into a lackluster pipeline. Until then, Merck's outlook appears murky. This company has a giant portfolio of products, but too many are at risk of sales losses soon or lack the sales punch to impress investors. Even Merck's usually-reliable animal health division saw its sales drop this quarter due to drug concerns.
If Merck can't right this ship soon, criticism over the company's direction -- and its stock's tepid performance over the past 52 weeks -- will only intensify.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool 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.