Big pharma giant Merck (NYSE:MRK) hasn't been shy about the fact that it's in the midst of a multi-year turnaround strategy focused on generating organic and acquired growth, but shareholders sometimes need a reminder that there could be bumps along the way. Today, they got that reminder.

Merck Hq

Source: Merck & Co.,

Merck reported its third-quarter earnings results before the opening bell Monday morning, and to put it briefly, while the results met or exceeding Wall Street's tempered expectations in many ways, they weren't very encouraging, at least over the near-term, if you're a Merck bull.

For the quarter, Merck reported a 4% decline in sales to $10.56 billion from $11.03 billion in the year-ago quarter. Adjusted profit declined about 2% to $0.90 per share from $0.92 in Q3 2013. GAAP earnings, which include restructuring costs, as well as acquisition and divestiture costs and benefits, fell a more pronounced 23% to $0.31 per share. Comparably speaking, Wall Street was looking for Merck to deliver $0.88 in adjusted EPS (the company beat by $0.02 per share) and $10.65 billion in sales (about a $90 million miss from the consensus). 

Exclusivity losses and increase competition double-whammy Merck
The real reason Merck underwhelmed Wall Street, and why its shares are down in excess of 2% as of this writing, has to do with the weakness its existing product portfolio has dealt with concerning patent exclusivity losses and increased competition that's begun crowding out some of its key branded drugs.

In the loss of exclusivity department no drug continues to feel the pain more than asthma treatment Singulair, which at one time was a drug that brought in well over $3 billion a year for Merck. In the latest quarter sales fell another 22% year over year to $218 million. In other words, generics have taken away around 75% of its previous sales since it went off patent in 2012. After delivering $1.2 billion in sales in all of 2013, Singulair may not hit $1 billion in sales this year.

Of course, Singulair is far from alone. Temodar, a therapy used to treat brain tumors, has witnessed sales slump from $596 million through the first three quarters in 2013 to just $264 million this year, all due to the introduction of generic competition.

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Source: Gilead Sciences.

The other major problem for Merck has been beefed up competition for some of its key drugs. Though Merck is in the process of developing its own innovative combo of hepatitis C drugs, its prior approved therapies are struggling since Gilead Sciences (NASDAQ:GILD) Sovaldi, and now subsequent cocktail drug Harvoni, were approved by the Food and Drug Administration. These two innovative oral drugs treat certain hepatitis C genotypes and allow these patients to be treated without the need for interferon, a therapy known to cause nasty flu-like symptoms in patients. As the maker of hepatitis C medication Victrelis and the producer of pegintron, Merck's hepatitis C products are being viewed as obsolete by Wall Street and physicians. Sales of Pegintron have dipped to $300 million through the first three quarters of 2014 compared to $372 million at this last year, while Victrelis has really taken a nasty tumble, producing a meager $132 million sales through the first nine months compared to $347 million at this time last year.

Merck does have bright spots
The good news is it wasn't a complete disaster for Merck, as other focus areas delivered solid gains. Merck's inflammatory disease segment saw notable strength, with Remicade's sales rising 5% to $604 million and Simponi's revenue jumping 35% to $170 million for the quarter. Merck's acute care segment was another bright spot, with Cancidas, Bridion, and Noxafil all registering double-digit year-over-year sales growth. And, most importantly, top-selling diabetes drugs Januvia/Janumet delivered a 5% increase in sales to $1.44 billion for the quarter.

Keytruda
Source: Merck & Co.,

Another bit of encouraging news was the announcement along with its earnings report that Keytruda, the company's anti-PD-1 inhibitor that's meant to enhance the body's immune system to better recognize and fight cancer, has been given the highly coveted breakthrough designation by the Food and Drug Administration as a possible treatment for advanced-stage non-small cell lung cancer. Though the designation only encompasses epidermal growth factor receptor mutation-negative and anaplastic lymphoma kinase rearrangement negative NSCLC patients, which will for now narrow its scope of treatment, the overall response data on Keytruda in other indications has been impressive, and this drug could bring new hope to NSCLC patients in the U.S. and possibly worldwide.

Looking toward the horizon
Looking ahead, Merck forecast full-year revenue of $42.4 billion-$42.8 billion, which was modestly lowered on the top-end from a prior estimate of $42.4 billion-$43.2 billion, and adjusted EPS of $3.46-$3.50, which is narrowed, but in line with its own prior guidance of $3.43-$3.53 per share. Both its full-year revenue and EPS ranges are right in line with current expectations from Wall Street via S&P Capital IQ.

What we're seeing here is a lot of promise for Keytruda and potentially its new hepatitis C combo drug, but not a lot of excitement beyond just a handful of drugs. It's possible Merck's DPP4 inhibitors Januvia/Janumet could also face pressure from SGLT2 inhibitors in the type 2 diabetes space as SGLT2 inhibitors come with the pleasant side effect of weight loss (DPP4's like Januvia/Janumet are weight neutral). Until we see stronger organic pipeline growth from Merck, or unless Keytruda just knocks it out of the park in its NSCLC indication, I'm happy to keep my feet planted squarely on the sidelines.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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