Despite big revenue jump, Merck posts big 2Q profit drop on higher costs, lower equity income

Merck’s 2Q net drops on higher costs, charges

Drugmaker Merck & Co. on Friday reported a 52 percent drop in second-quarter net income, weighed down by big restructuring charges from buying Schering-Plough Corp., generic competition and other factors.

Merck, the world’s second-biggest drug company by revenue, beat analysts’ profit expectations by 3 cents a share, but came up short on revenue and slightly reduced its sales forecast for the year. Given those factors, a 2010 income forecast now below Wall Street expectations and several pressures that could affect its full-year results, investors drove shares down in morning trading.

Leerink Swann analyst Seamus Fernandez termed it a “slightly disappointing quarter.”

The maker of allergy medicines Singulair and Nasonex and cholesterol drugs Vytorin and Zetia said its net income was $752.4 million, or 24 cents per share. That’s down from $1.56 billion, or 74 cents a share, a year earlier.

Excluding one-time items, income would have been $2.71 billion, or 86 cents a share. That beat the forecast of analysts surveyed by Thomson Reuters. They expected 83 cents a share, excluding items, on revenue of $11.45 billion.

The charges, including $1.7 billion in asset and inventory write-downs and $894 million in merger-related restructuring costs, cut net income by a total of $1.96 billion, or 62 cents per share.

“Our strong bottom-line performance in the second quarter demonstrates Merck’s continued success in executing our post-merger strategy,” Chief Executive Richard T. Clark told analysts. “Already we’re seeing positive signs of what can be achieved — despite patent (expirations) and a challenging economy.”

Merck shares fell 60 cents, or 1.7 percent, to close at $34.46 Friday.

“We don’t expect investors to get overly excited,” Credit Suisse analyst Catherine Arnold wrote in a research note, “as the beat was mainly due to lower expenses and lower taxes.”

Analysts noted that Merck’s tax rate was down from 23 percent to 20.5 percent.

Merck forecast full-year net income of 82 cents to $1.16 per share, or $3.29 to $3.39 excluding items — a slightly narrower range than before, but with the same $3.34 midpoint. Analysts expect $3.37 per share, on average. Merck said it expects revenue of $45.4 billion to $46.1 billion, with the top end down $300 million from its April forecast.

The new outlook is based on Merck retaining rights to roughly $3 billions in annual sales of biologic drug Remicade and its successor, Simponi, in a dispute with Schering-Plough partner Johnson & Johnson that goes before an arbitrator in late September. Executives also noted Merck faces significant costs in the second half of the year for the ongoing restructuring, new product launches and expansion in emerging markets, on top of increasing price reductions by cash-strapped European governments trying to hold down health spending.

Second-quarter revenue nearly doubled to $11.35 billion, due to Schering-Plough’s prescription drugs and consumer and animal health products. Merck, based in Whitehouse Station, N.J., bought its New Jersey neighbor in November for $41 billion, also gaining its biologic drug business and a strong pipeline of drugs in development.

Prescription drugs sales totaled $9.78 billion in the quarter, down 2 percent from the combined revenue of the two companies a year earlier. Sales were led by allergy and asthma drug Singulair, although they were flat at $1.26 billion, and by Remicade, for rheumatoid arthritis and other immune disorders, up 18 percent at $669 million.

Recent generic competition slashed sales of related blood pressure drugs Cozaar and Hyzaar by 46 percent, to $485 million. Sales of cholesterol drug Vytorin, hurt by ongoing efficacy and safety concerns in the U.S., fell 8 percent, to $490 million. Meanwhile, diabetes pills Januvia and Janumet were each up at least 30 percent, to $600 million and $218 million, respectively.

The animal health division had sales of $731 million. The consumer business, led by strong sales of Coppertone sun care items and nonprescription allergy pill Claritin, posted $422 million in sales.

For the first six months, net income totaled $1.05 billion, or 33 cents per share. That was down 65 percent from $2.98 billion, or $1.41 per share, in the first half of 2009.