ISPH Inspire Pharmaceuticals, Inc. (MM)

Merck & Co.'s (MRK) earnings per share (excluding  special items) for the first quarter of 2011 came in at 92 cents, well above the Zacks Consensus Estimate of 84 cents and the year-ago earnings of 83 cents. Double-digit growth of key products and cost control boosted earnings.

Revenues for the quarter increased 1.4% to $11.6 billion, just above the Zacks Consensus Estimate of $11.2 billion. Strong performance of products like Januvia, Janumet, Singulair, Isentress, Nasonex and Remicade was offset by lower sales of Cozaar and Hyzaar.

Results by Product

Singulair, indicated for the chronic treatment of asthma and relief of symptoms of allergic rhinitis, recorded $1.3 billion in sales, up 14% from the year-ago period. The product performed well in the US, Japan and emerging markets.

Meanwhile, Remicade sales increased 12% to $753 million. Merck settled its dispute with Johnson & Johnson (JNJ) regarding the distribution rights for Remicade and Simponi. This has removed a significant overhang from the stock.

Cardiovascular franchise sales, primarily consisting of Vytorin and Zetia, increased 4.2% to approximately $1.1 billion.

Isentress, the company’s product for HIV infection, recorded an increase of 26% to $292 million during the reported quarter. Growth was driven by demand in the US and Europe. Isentress’ label was expanded in both Europe and the US in 2009 to include its use as a combination therapy for previously untreated patients. As a result, we expect the drug to record higher sales. PegIntron sales, indicated for treating hepatitis C, came in at $166 million, down 11%.

Sales of Merck’s antihypertensive medicines, Cozaar and Hyzaar, continued to decline during the first quarter. Sales came in at $426 million, down 46%. The decline was expected as these drugs lost marketing exclusivity in the US and major European markets in 2010. We expect sales to continue declining going forward. Temodar sales also declined (down 10% to $248 million) due to generic competition in Europe.

The diabetes franchise, consisting of Januvia and Janumet, continued to perform well. Combined sales exceeded $1 billion for the first time with Januvia sales increasing 45% to $739 million and Janumet sales increasing 52% to $305 million. Merck is working on increasing sales of its diabetes franchise by gaining approval for additional indications. The company is currently seeking approval for an extended-release formulation of Janumet for type II diabetes. Merck is also seeking approval for a Januvia/Zocor combination for the treatment of diabetes and dyslipidemia.

Gardasil, Merck’s cervical cancer vaccine, posted sales of $214 million, down 8% year over year. Zostavax sales fell 74% to $24 million. The decline in Zostavax sales was expected due to supply issues. Meanwhile, Merck’s ProQuad, MMR II and Varivax vaccines recorded combined sales of $244 million, down 23%.

Merck’s animal health segment posted sales of $758 million, up 7%. We note that Merck terminated its agreement with Sanofi-Aventis (SNY) for setting up a joint venture in the animal health market.

FDA Panel Backs Victrelis

Merck’s hepatitis C candidate, Victrelis (boceprevir), which is currently under regulatory review in both the US and the EU, recently received a favorable recommendation from the US Food and Drug Administration’s (FDA) Antiviral Drugs Advisory Committee. A final response from the FDA should be out by mid 2011.

Inspire Deal to Close in Second Quarter

Merck expects to close its acquisition of Inspire Pharmaceuticals, Inc. (ISPH) in the second quarter of 2011. The deal, which has been valued at $430 million, was first announced in April 2011. With this acquisition, Merck is looking to expand its ophthalmology product portfolio.

Guidance

With the release of first quarter results, Merck updated some components of its guidance. The company now expects adjusted earnings in the range of $3.66 - $3.76 in 2011 (old guidance: $3.64 - $3.76). The Zacks Consensus Estimate currently stands at $3.69.

While the company reduced its R&D guidance to $8.0 billion to $8.4 billion (old guidance: $8.1 - $8.5 billion), revenue guidance was maintained. Merck expects 2011 revenue to grow in the low to mid single-digit percentage range year over year.

Neutral on Merck

We currently have a Neutral recommendation on Merck, which is supported by a Zacks #3 Rank. Merck is currently facing issues such as patent expirations of key drugs, EU pricing pressure, US health care reform, and pipeline setbacks. We believe the company will resort to cost-cutting initiatives to drive the bottom line. Meanwhile, some of the company’s recent launches should start contributing significantly to the top line in the forthcoming quarters.

 
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