Merck (NYSE:MRK) will release its quarterly report on Wednesday, and investors expect to see mixed results from the pharmaceutical giant, as profits could rise even as sales decline. That's a similar pattern to what we've seen from Pfizer (NYSE:PFE), Teva Pharmaceutical (NYSE:TEVA), and other pharmaceutical companies, but Merck faces the longer-term challenge of getting both revenue and profits to hit bottom and start growing at a more consistent pace in the future.

Merck remains a colossus in the health-care industry, even as Pfizer, AbbVie (NYSE:ABBV), and some other competitors have made moves to slim down their extensive operations and instead focus on key growth areas. Yet even though it has been slower than its rivals to consider major corporate moves, Merck nevertheless has a lot of potential to make strategic shifts that could unlock the value of some of its business divisions. 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.

Source: Wikimedia Commons.

Stats on Merck

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$11.36 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Which way are Merck earnings headed this quarter?
In recent months, analysts have been a bit less upbeat about Merck earnings prospects, keeping fourth-quarter estimates stable but cutting about 1% from their projections for the full 2014 year. The stock hasn't held back, though, climbing 15% since late October.

Merck's third-quarter earnings told a story that investors in Pfizer and many other branded-pharmaceutical companies can understand all too well. Even though its adjusted net income beat expectations, Merck's sales fell short of what investors wanted to see, as the loss of patent protection on asthma treatment Singulair and weak sales of its diabetes drug Januvia weighed on its overall results. A reduction in GAAP earnings guidance and continuing expectations for a year-over-year revenue drop of about 5% to 6% between 2012 and 2013 weighed on the stock.

Moreover, a big part of Merck's trouble is that just about all of its business segments have been performing poorly. Pharmaceuticals make up about 86% of Merck's total sales, but during the third quarter, revenue fell at its consumer-care and animal-health segments, as well as for its catch-all "other revenues" category. Problems in maintaining focus are a big part of why Pfizer, AbbVie, and other companies have joined the trend toward breaking up big health-care conglomerates rather than trying to maintain a firm grip on a sprawling set of businesses under one roof.

Still, drug development is a key driver of overall results for Merck, and the bulk of Merck's share-price gains over the past quarter came in mid-January, when the drug company said that it began its FDA submission process for its MK-3475 melanoma and cancer therapy. With expectations of completing the application by mid-2014, Merck hopes that the drug will live up to huge potential, with many analysts looking for MK-3475 to treat not only melanoma but also other types of cancer and hit peak sales levels of $3 billion or more. That would go a long way toward replacing lost revenue from Singulair and other patent-cliff losses.

Merck is also working hard to find strategic alliances. The company said just this week that it would invest $2.3 billion in Belgium's Ablynx, a biotech company that could help Merck develop its cancer-fighting pipeline even more quickly. Perhaps more importantly, some believe that Merck might make a deal with Novartis to swap Merck's over-the-counter consumer products business for Novartis' animal-health line. That at least would make Merck a bigger player in animal health while divesting itself of one minor business, even if it wouldn't represent a full solution that Pfizer's and AbbVie's complete spinoffs addressed more efficiently.

In the Merck earnings report, watch for two things: the latest on its drug pipeline, and any news on the corporate restructuring front. Having held out for so long, a decision from Merck to make a major shift in structure could make the stock soar if investors like what they see.

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