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Merk (NYS: MRK) Earnings Not Red Hot Anymore

 March 14, 2012 01:28 PM

Last Tuesday, pharmaceutical giant Merck & Co. (NYSE:MRK) posted its estimates of first-quarter profits, declaring that it would earn about 95 to 98 cents a share, excluding expenses associated to acquisitions and restructuring. This is slightly below the consensus estimate of $1.01 a share. The company also said that it expected its revenues this year "to be at or near 2011 levels on a constant currency basis. At current exchange rates, sales would be unfavorably affected by about 2-3%." (Merck's calculations are based on an exchange rate of $1.31/euro.)

After the announcement, the company stock fell nearly 3% to end at $37.44. While the stock subsequently recouped some of its losses, it was still down 0.87% for the week. Moreover, since peaking at $39.26 in mid-January, Merck has been on a downward trajectory.

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Nonetheless, while the company's first-quarter guidance was below expectations, it also reaffirmed its guidance for the whole year, in which it expects to earn $3.75-$3.85 a share in 2012. The company said it would continue the reduction of annual R&D costs by $900 million, while continuing investment in key programs.

Given the above, analysts generally remain sanguine about the company's growth prospects for this year. UBS analyst Marc Goodman kept a "buy" rating on Merck, saying that investors now have low expectations for the company, which could report positive results for several drug products over the next few quarters. These include the allergy and asthma treatment Singulair and diabetes medication Januvia. (In 2011, Singulair accounted for $5.48 billion or 11.4% of the company's total revenues.)

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In addition, while Merck might have a reputation for having a weak pipeline, it still has 17 potential launches under development. Last Thursday, JPMorgan analysts wrote that "from an R&D budget standpoint, while Merck has a number of large outcomes studies currently running, the company is implementing a more disciplined approach to R&D that we believe could result in a more focused pipeline and lower expense levels over time."



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