Lagging Januvia weighs on Merck's none-too-pretty first quarter

Nothing spoke more loudly today of Merck's ($MRK) current worries than its new $15 billion stock-buyback program. That's quite a hefty sum to dole out to shareholders. But with sales suffering from Singulair generics, an unexpected shortfall in Januvia sales, and a series of recent R&D disappointments to its credit, Merck needs all the investor-relations help it can get.

First-quarter sales were down 9% to $10.7 billion, fully a billion dollars less than analysts had expected, Reuters notes. Net income dropped slightly, and it was a one-time R&D tax credit that pushed earnings per share above analyst estimates. Understandably, the company dropped its profits forecast to $3.45 to $3.55 per share, from the $3.60 to $3.70 predicted earlier this year.

But it was the lag in Januvia sales that really raised eyebrows; after all, everyone knew Singular sales would be way down now that it's off patent. The diabetes drug, a serious blockbuster and one of Merck's fastest-growing drugs of late, brought in $884 million for the period, 4% less than last year--and almost 19% less than analysts had expected. Janumet, a combination of Januvia and metformin, grew by 4%, to $409 million, but that still fell short of expectations. Last year's first quarter was a much different story; then, the two drugs each grew in the high double digits.

Merck cited inventory reductions as the reason for Januvia's poor performance in the U.S. But demand may have also played a role. Worried by data suggesting an increase in pancreatitis risk, the FDA recently said it would review Januvia and other drugs in its class. Then again, Novo Nordisk's ($NVO) Victoza--also part of that safety review--saw 36% growth for the quarter, to about $474 million.

Analysts were none too impressed. The buyback plan "is a positive for investors, but doesn't address poor recent research and development productivity and may be viewed as a temporary band-aid to cover a worrying decline in the growth of Januvia," Jefferies analyst Jeffrey Holford said in an investor note (as quoted by Reuters).

"The share re-po is now the second 'bone' that management has thrown to the angry shareholder mob," ISI Group analyst Mark Schoenebaum said in an investor note. On the whole, he said, "It doesn't look pretty."

The first bone, Schoenebaum said, was Merck's decision to replace longtime R&D chief Peter Kim with Roger Perlmutter, a Merck alum who until recently held the R&D reins at Amgen ($AMGN). That choice only underscores Merck's R&D troubles, which include the recent abandonment--and withdrawal--of the cholesterol pill Tredaptive, Sanford C. Bernstein analyst Tim Anderson said (as quoted by Bloomberg). "The news that head of R&D Peter Kim is leaving the company supports the idea that Merck has lost its way to some degree in terms of R&D," Anderson said.

Perlmutter is well respected, and if there was an uplift in mood during the first-quarter earnings call, it came when he took the microphone. Merck will need those positive expectations to become reality, particularly if Januvia's sales continue to disappoint.

- get the release from Merck
- see the Forbes story
- read the Reuters article
- check out the Bloomberg piece

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