Merck beats Q2 earnings estimates, but mostly on cost-cutting

Merck ($MRK) surprised Wall Street analysts today when it announced that its net profit in the second quarter jumped to $2 billion from $906 million in the same period a year ago, and that it was raising the lower end of its income forecast for 2014. But it's not exactly time to pop out the champagne corks and declare a successful turnaround: The company's positive results did not come from better-than-expected sales.

On the contrary, Merck's worldwide sales fell 1% to $10.9 billion during the quarter. Sales of its prescription drugs dropped 2% to $8.45 billion. Yet its earnings per share came in at 85 cents--beating analyst's estimates of 81 cents. And the company is now saying it expects to earn at least $3.43 per share this year, up from its previous forecast of at least $3.35.

The main reason for the better-than-expected results is cost-cutting. Last year, Merck announced it would lay off a staggering 8,500 workers in a bid to save $1 billion in R&D costs and other expenses. In today's earnings release, the company said it cut its R&D expenses 21% to $1.7 billion and shaved its marketing and administrative burden by 5% to $3 billion.

The bloodletting at Merck has continued throughout the year, with the most recent cuts coming in Pennsylvania, where 600 sales reps are expected to get pink slips by August. According to Merck's most recent quarterly report, the company has nearly completed the job cuts announced last year. All told, Merck has laid off 40,000 people since 2008.

Merck's best performer during the last quarter was actually the one unit that it's about to lose: its consumer health business, which saw its sales grow 19% to $583 million. In May, Merck agreed to sell the unit to Bayer in a $14.2 billion deal that's expected to close this year. As for the sales decline in its prescription business, Merck blamed patent expirations, divested products, and a drop in sales of its hepatitis C drugs.

Merck's drugs to treat hep C have been overtaken in the market by the entry of Gilead's ($GILD) blowout hit Sovaldi--a $1,000-per-day treatment that effectively cures the disease. Merck is developing a Sovaldi rival, and in June it took another step to bolster its presence in the hep C market by buying Idenix Pharmaceuticals ($IDX) for $3.8 billion. Idenix is working on three drugs to treat the virus.

During the last quarter, Merck recorded a gain of $741 million when its longtime marketing partner, AstraZeneca ($AZN), exercised its option to buy out Merck's interest in the heartburn drugs Prilosec and Nexium. Merck also recorded more than $900 million in tax benefits.

But such one-time gains can't make up for the decline of Merck's prescription business, which was placed in the hands of R&D chief Roger Perlmutter last year. Indeed, Perlmutter acknowledged recently that Merck is on the hunt for more acquisitions of promising drugs it can add to its pipeline.

- here's Merck's earnings release
- read more at Bloomberg
- here's the AP's take

Special Report: The top 10 largest pharma layoffs in 2013 - Merck