Schering-Plough effects mask Merck & Co's underlying profit growth

Merck & Co saw its net profit attributable to the company tumble from $1.43 billion to $299 million in the first full quarter following the closure of its merger with Schering-Plough. However, when purchase accounting, restructuring and merger-related costs are stripped out, net profit stood at $2.61 billion. EPS fell from $0.67 to $0.09, although when adjusted the figure was $0.83, up from $0.74 a year before.

Group sales were $11.42 billion, up by 7% on the combined first-quarter 2009 totals of Merck & Co and Schering-Plough. Human health revenues accounted for $9.79 billion (+6%).

Commenting on the fact that the company had apparently performed healthily against its own previous prediction of a weak first half and stronger second half in 2010, chief financial officer Peter Kellogg said that this was generally down to one-off factors whose effects would even out over the year. These factors included short-term inventory building of vaccines by purchasers, the timing of certain R&D costs being delayed, and a positive foreign exchange effect that is not expected to be sustained for the full year. However, he added that the company "clearly had a stronger than expected first quarter and our expense management contributed to that performance".

The company said that it was on track to realise its target of $3.5 billion of annual merger synergies in 2012. For 2010, it expects adjusted EPS of $3.27-3.41, or $1.15-1.50 as reported. Revenues of $45.4-46.4 billion are expected, including a $170 million reduction related to healthcare reform in the US ($33 million in the first quarter).

Full-year adjusted R&D costs are expected to be $8.3-8.7 billion; in the first quarter reported R&D costs were $2.03 billion including $27 million of charges for in-process R&D impairments.

Aside from a four percentage point boost from positive foreign currency effects, revenues were driven by 10% growth in the group's top-selling drug, the asthma and allergy product Singulair (montelukast), which performed particularly well in Japan and emerging markets; as well as by the TNF-targeting antibody Remicade (infliximab; +30%).

However, uncertainty persists over the future of the former Schering-Plough product Remicade, as partner Johnson & Johnson argues that the combination of the two companies constituted a change of control that should have triggered rights to it and follow-on product Simponi (golimumab) going automatically to J&J. The two companies are set to enter arbitration in September and Merck & Co refused to comment beyond saying that it saw Remicade and Simponi as significant growth drivers and was targeting a high single-digit adjusted EPS compound annual growth rate from 2009 to 2013 regardless of the outcome of the arbitration. Observers believe the two companies will settle before arbitration begins, perhaps with Merck & Co accepting a lower royalty rate or handing over certain consumer assets to J&J in exchange for Remicade, which J&J markets in the US and Merck & Co markets internationally.

Other products that performed well included Januvia (sitagliptin) for type 2 diabetes and the HIV integrase inhibitor Isentress (raltegravir), while the animal health division contributed $709 million, up by 14%.

Dragging on sales were consumer care products (–2% to $379 million), Fosamax (alendronate), whose US patent expired in 2008, Pegintron (peginterferon alfa-2b) and Cozaar/Hyzaar (losartan), following the latter's loss of market exclusivity in the US and major European markets.

Merck & Co's First-quarter 2010 Top Product Sales ($ mill)

Product	Q1 sales	% change
Singulair	1,165	+10
Cozaar/Hyzaar	782	–7
Remicade	674	+30
Zetia	534	+5
Januvia	511	+24
Vytorin	477	–
Nasonex	320	+4
ProQuad, M-M-R II and Varivax	319	+27
Temodar	274	+11
Gardasil	233	–11
Isentress	232	+57
Fosamax	230	–12
Janumet	201	+56
PegIntron	186	–14
Clarinex	174	–
Primaxin	159	–3