Merck Sees Vaccines, Cost Cuts Offsetting Zocor Slump in 2007 [WSJ]
By PETER LOFTUS
December 6, 2006 2:14 p.m.
Merck & Co. said Wednesday it expects earnings to rise anywhere from 5% to 14% in 2007, as cost cuts and higher vaccine sales are expected to help offset sharply lower sales of its Zocor cholesterol-lowering medicine.
Merck's new 2007-forecast range straddles current Wall Street expectations. Merck shares were at $44.42 in recent trading, down 59 cents for the day.
But the forecast could prove somewhat risky. The 2007 sales projection assumes a launch in the U.S. of Arcoxia, an arthritis drug whose approval has been delayed by the Food and Drug Administration. Merck recently submitted new data from Arcoxia patient trials to the agency and said an FDA decision could come in April 2007. But a timely FDA approval is no sure thing, particularly because Arcoxia belongs to the same class of drugs as Vioxx, the painkiller that Merck pulled from the market in 2004 over safety concerns.
The Whitehouse Station, N.J., drug maker reiterated its 2006 financial forecast and said it continued to expect compound annual earnings-per-share growth in the double digits on a percentage basis, excluding one-time items and charges, from 2005 to 2010. The company sees compound annual revenue growth of 4% to 6% from 2005 through 2010, factoring in half the revenue from Merck's joint ventures.
Battling Back
Merck is trying to battle back from a series of setbacks, including the Vioxx withdrawal and the June loss of market exclusivity for Zocor, which had been Merck's top-selling drug. The Vioxx withdrawal has not only hurt Merck's revenue but also has sparked massive litigation in which people allege they suffered heart attacks after taking the pills.
Merck has tried to soften the blows by cutting costs. Last year, the company announced it would cut its world-wide work force by 11%, or 7,000 employees, and close some plants by the end of 2008. As of Sept. 30, some 3,900 positions had been eliminated, Merck said Wednesday. Merck is aiming for pretax savings of $4.5 billion to $5 billion from 2006 through 2010.
Merck also plans to keep research-and-development spending growth in the mid-single digits on a percentage basis in coming years. The company sees its 2010 marketing and administrative expenses flat with 2006.
Meanwhile, bolstering the top line, Merck has introduced three new vaccines this year: Gardasil, the first vaccine to prevent cervical cancer; Rotateq for rotavirus; and Zostavax for shingles.
Merck said Wednesday it expects vaccine sales of $2.8 billion to $3.2 billion in 2007. It didn't provide a vaccine sales estimate for 2006, but the 2007 projection would represent nearly a tripling from 2005 vaccine sales. That is much-needed growth for Merck because Zocor sales are expected to plunge to less than $1 billion in 2007 from an expected range of $2.6 billion to $2.9 billion this year, hurt by cheaper, generic competition.
Merck also indicated it expects sales growth for Januvia, its new diabetes drug, and potential new product launches in 2007.
Strategy on Track
"Our strategy is progressing on track," Merck Chief Executive Richard Clark said during a conference call with analysts. "We remain fully focused on executing so that we can deliver sustained revenue and earnings growth over the long term." He said Merck expects "sustained" earnings and revenue growth beyond 2010, fueled by its growing pipeline of potential new products.
For 2007, Merck said it expects earnings in the range of $2.36 to $2.49 a share, compared with an expected range of $2.18 to $2.25 a share this year. Both forecasts include restructuring charges related to plant closures and job cuts.
Excluding the charges, Merck sees 2007 earnings of $2.51 to $2.59 a share, compared with an expected range of $2.48 to $2.52 a share in 2006. The mean earnings estimates of analysts surveyed by Thomson First Call are $2.51 a share in 2006 rising to $2.56 a share in 2007.
Merck's forecasts don't reflect the establishment of any reserves for potential liability in the Vioxx litigation, and exclude the impact of potential acquired research expense from Merck's agreement to acquire Sirna Therapeutics Inc. Merck agreed in October to buy Sirna for about $1.1 billion, and the deal is expected to close in early 2007.
Merck is "nowhere near" the point where it can establish a reserve for potential liability in the Vioxx litigation, Chief Financial Officer Judy Lewent said Wednesday. Under accounting standards, she said, the company must first be able to "reasonably estimate" the size of the reserve.
Top Sellers
In addition to vaccines, other expected top sellers in 2007 include Singulair for allergies and asthma, which is seen generating sales of $3.7 billion to $4 billion, up from an expected $3.4 billion to $3.7 billion this year. Merck expects its Cozaar and Hyzaar drugs for hypertension to post sales of $3.1 billion to $3.4 billion in 2007, compared with $3 billion to $3.3 billion this year. Sales of Fosamax, an osteoporosis drug, are expected to be $2.6 billion to $2.9 billion, compared with $2.8 billion to $3.1 billion this year.
Merck also provided a 2007 estimate for sales of "other reported products" of $5.2 billion to $5.6 billion. Ms. Lewent said this includes the potential U.S. launch of Arcoxia in 2007. Arcoxia is already approved for sale in at least 62 other countries. But U.S. approval has been held up by concerns about its cardiovascular risks. Merck recently submitted data suggesting Arcoxia's heart risks were no different than an older painkiller called diclofenac, but the data have been criticized due to signs that diclofenac itself might have a higher heart risk than other painkillers.
"It seems Merck has been quite conservative recently, but it seems like an Arcoxia launch assumption may be somewhat high risk," Merrill Lynch analyst David Risinger told Merck executives during the conference call.
Ms. Lewent said Merck's forecast is consistent with its recent submission of new data to the FDA, and "obviously we have to await the process and dialogue with the FDA."
Still, some analysts suggested in research notes that Merck's 2007 forecast appeared conservative, though that was before the conference call when Merck revealed that Arcoxia was part of that outlook. Deutsche Bank analyst Barbara Ryan noted that Merck boosted its guidance three times in the past year, and "has handsomely executed on a strategy to, in our opinion, understate and overperform."
Merck reiterated its intention to maintain its shareholder dividend at current levels, and to use cash for share repurchases. Also, Merck plans to aggressively seek external research and development collaborations to bolster its pipeline, Ms. Lewent said.
Merck has scheduled a Dec. 12 meeting with analysts and investors at its headquarters, where executives will discuss the company's outlook in more detail.
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