Merck to report on Schering-Plough integration, new biotech ventures, drugs in development

Earnings Preview: Merck to report 4th-qtr results

TRENTON, N.J. — Merck & Co., a Dow component and the world’s second-biggest drugmaker by revenue, reports fourth-quarter results before the stock market opens Tuesday.

WHAT TO WATCH FOR: Key items will be profit forecasts for this year and beyond, and progress in integrating Schering-Plough Corp., which Merck bought for $41.1 billion on Nov. 3. The deal vaulted Merck from eighth place to second in the pharmaceutical industry, giving it Schering’s biologic drugs, popular consumer health lines such as Claritin allergy pills and Coppertone sun care, and a top animal health business.

Merck has said it plans to eliminate roughly 16,000 jobs and find savings of about $3.5 billion by 2012. Analysts want to know how that’s going, as Pfizer Inc., which bought Wyeth in October, hasn’t seen huge initial savings.

Merck, based in Whitehouse Station, N.J., also may give updates on key drugs in development — it has more than a dozen in late-stage testing, including several for heart disease — and plans to launch at least a few new drugs this year.

Two weeks ago, Merck’s Schering-Plough unit got European Commission approval for a new injected fertility drug called Elonva that stimulates the ovaries for an entire week, potentially reducing the number of initial shots from seven to one.

The unit also got approval in December for an over-the-counter drug for severe heartburn, Zegerid, that could be a big seller.

Merck, the world’s biggest vaccine seller, also got approval in the fourth quarter to market its Gardisil vaccine against cancer-causing human papilloma virus to boys and men up to age 26. It’s expected to present new data next week on that use and use in women ages 27 to 45 — a group for which the Food and Drug Administration already has denied approval. Meanwhile, in January Merck ended testing of HIV drug Vicriviroc, due to disappointing final-stage test results.

Merck is awaiting U.S. and European approval of a new asthma drug called Dulera, and European approval of two drugs Schering-Plough developed: Saphris, which got U.S. approval in August for schizophrenia and bipolar disorder, and Nomac/E2, a birth control pill containing natural rather than synthetic estrogen.

Merck likely will discuss its forays into biologic drugs, including its January purchase of Britain’s Avecia Biologics, which has promising manufacturing technology for such drugs.

Analysts may ask about withdrawn arthritis pill Vioxx, as Merck this week agreed to settle lawsuits brought by shareholders who lost billions — by appointing two committees and a chief medical officer to oversee drug safety issues.

Executives likely will mention the board’s November approval of a $3 billion program to repurchase Merck shares, good for investors because Merck issued 1 billion new shares to help pay for Schering-Plough.

Analysts likely will also ask about a January federal court ruling that Merck’s patent on Temodar, for brain cancer, is unenforceable, a decision that could bring generic competition.

WHY IT MATTERS: Merck bought Schering-Plough to deal with the big three problems threatening it and many other major drugmakers: drooping profits, intensifying generic competition cutting into sales and a dearth of major new products. Slashing thousands of jobs will cut costs and boost profits in the short term, adding Schering-Plough’s wide range of products will prop up sales and diversify the company overnight, and Schering has one of the industry’s best portfolios of drugs in late development.

Merck has said it aims to become a top maker of biotech drugs, so the purchase of Avecia is a good first step after buying Schering-Plough, which is a leader in fertility treatments. Avecia makes batches of experimental biotech drugs for human testing by other companies, using rapidly reproducing cells including yeast and E. coli to repeatedly make copies of active drug ingredients.

Such biologic drugs generally are more powerful than pills and are prized by traditional drugmakers these days because they command high prices and so far have not faced U.S. generic competition.

WHAT’S EXPECTED: Analysts on average anticipate Merck will report 2009 revenue of $26.72 billion, including two months of Schering-Plough sales, and earnings per share of $3.26, jumping to $3.46 this year and $4.17 a share in 2013. For the fourth quarter they forecast earnings per share of 78 cents on revenue of $9.38 billion.

Barclays Capital analyst Tony Butler calls Merck his top pick in the industry, with a “Buy” rating, because of its “diversified revenue base, significant pipeline opportunities,” cost-cutting possibilities and other factors that give “a solid outlook.” Bernstein Research analyst Tim Anderson also sees Merck as a top company, “driven by its decent revenue profile” through 2015. “We feel (Merck) is at its core a good R&D company despite some of the setbacks the company has faced over the last several years,” Anderson wrote to investors.

LAST YEAR’S QUARTER: A year ago, Merck reported a profit of 78 cents per share on revenue of $6 billion. Schering-Plough posted a profit of 27 cents per share on revenue of $4.35 billion.