Merck Sets the Stage for a Great 2015



Merck & Co. (NYSE:MRK) has had a good 2014 so far. Shares are up more than 8 percent this year to date as the pharmaceutical and health care company engages in a radical restructuring program that includes an overhaul of its research and development and the likely separation of its consumer and animal health businesses. The process began in October with plans to cull $2.5 billion from operating costs, and the Merck we will see in 22 months — at the end of 2015, when the program is expected to be complete — will be a leaner, meaner company.

The journey there, though, will have its obstacles. Merck reported fourth-quarter and full-year results on Wednesday morning that revealed some of the cracks in the company’s structure, although financials came in about as expected by analysts. Fourth-quarter adjusted earnings increased 6 percent on the year to 88 cents per share, while worldwide sales fell 4 percent to $11.3 billion, “reflecting unfavorable impact of patent expiries and a 3 percent negative impact from foreign exchange.” Unadjusted, GAAP earnings fell by 13 percent on the year to 26 cents per share, reflecting acquisition and restructuring costs.

The picture for 2013 is a little less rosy. Adjusted full-year earnings fell 8.6 percent to $3.49 per share, while sales fell 6.8 percent to $44 billion. Both results were approximately in line with analyst expectations. The top- and bottom-line contractions are indicative of the headwinds facing the company — the pharmaceutical and health care industry at large, really — and investors can look forward to more of the same in 2014.

A number of analysts became increasingly bullish on Merck after it filed for approval of a new cancer drug, currently known as MK-3475, a year earlier than anticipated. David Risinger, an analyst with Morgan Stanley who spoke with MarketWatch, raised his rating on Merck to overweight from underweight and suggested that the drug could bring more than $6 billion in sales annually before 2020. An initial round of testing should be completed in the first half of 2014. Regulatory actions for a half-dozen other drugs are expected in 2014.

Looking ahead, Merck is targeting full-year adjusted 2014 earnings per share in a range between $3.35 and $3.53. This range covers the current mean analyst target of $3.48 per share. Full-year sales are expected in a range between $42.4 billion and $43.2 billion before the impact of currency and including the impact of patent expirations. The top of this range is slightly below the current mean analyst estimate of $43.35 billion.