Merck sales slump again, but cost cuts keep earnings coming

On the Big Pharma scorecard, Merck remains on a downward slide. Yes, third-quarter earnings beat estimates, but expectations were low, and it was cost-cutting that delivered the day. And though the Singulair drag on Merck's ($MRK) top line is easing up a bit--pulling overall sales back by 4%, rather than 9% in the first quarter--the Januvia malaise continues.

The basics are these: Global revenue fell short of analyst estimates at $11 billion, a decline of 4%. For the first 9 months, the global sales slide amounted to 8%. Excluding items, EPS fell to 92 cents from 95 cents last year. Januvia is down, Vytorin is down, Singulair is, of course, down. Some products are on the upswing, however: for instance, Gardasil, the human papillomavirus vaccine, brought in $665 million, an impressive 15% increase, and Remicade delivered a 17% increase to $574 million. And had the U.S. dollar cooperated, Merck's overall sales would have dropped only 2%.

As sales continue to slide and drug-development setbacks curtail its hopes for a near-term top-line turnaround, Merck is struggling to get its act together, with stepped-up cost-cutting plans and an R&D overhaul. The company said earlier this month that it would cut 8,500 more jobs, or about 10% of its workforce, plus jettison some in-development products and take further budget-cutting steps to save $2.5 billion in annual costs. This quarter, R&D spending is down 13% on the quarter, and marketing down 8%.

Product-wise, it's Januvia that really has people worried. The diabetes drug ended the third quarter with a 5% decline in global sales. Prescription numbers fell, too. "If the volumes continue to decline, definitely it will be a problem for us," Merck's head of global human health, Adam Schechter, said during today's earnings call (as quoted by Reuters).

As Barclays analyst Tony Butler points out, Januvia faces more competition, with new treatments on the horizon and established drugs fighting hard for market share. "We believe both volume and pricing opportunities for Januvia/Janumet are limited going forward," Butler wrote to investors (as quoted by Bloomberg). Morningstar's Damien Conover concurs: "It looks like Januvia may be plateauing," he said.

As ISI Group analyst Mark Schoenebaum quickly noted, "Merck sentiment continues to get really bad. I've become increasingly frustrated with fighting this management discount."

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