MRK Earnings Upside; Top-Line Miss No Big Deal, Dividend Continues To Support

Merck & Co. (NYSE:MRK) reported better than expected earnings Friday morning, with EPS of $0.95 vs. the Street Consensus of $0.93. While 3Q total revenues came in below expectations ($11.49 billion vs. the Consensus estimate of $11.56 billion), the shortfall was explainable with sales of allergy medicine Singulair missing due to heavy generic competition (expected by investors) and diabetes treatment Januvia off due to staggered shipments of the drug to Japanese partner, ONO Pharmaceuticals. Notably, Merck guided on its 2Q 2012 earnings call that the ONO shipment would negatively impact 3Q Januvia sales by about $100M, but some analysts neglected to model this into their estimates. Despite the revenue miss, the company beat bottom line expectations on reduced marketing and sales spend (less promotion with Singulair losing patent exclusivity) and a lower-than-expected tax rate for the period. Importantly, Merck tightened its 2012 EPS guidance range to $3.78-$3.82 (vs. prior $3.75-$3.85), which remains consistent with the Consensus estimate of $3.81. The company also re-affirmed prior guidance for this year’s tax rate, thus the anomaly this quarter with regard to the lower rate appears to be only temporary. No surprise that MRK is down slightly pre-market, as analysts focus on the weaker Januvia sales result, given that this product line is Merck’s most important growth driver. However, the mood leaving the earnings call should be more upbeat once this is explained again. The next key catalyst for the company is Phase III data later this year for Tredaptive, the company’s niacin-based treatment to raise HDL cholesterol (the good cholesterol). MRK has weakened along with the broader market and we believe the shares are poised to gain back some ground in the near term. MRK continues to be supported by its strong cash flow and attractive 3.7% dividend yield. Buying weakness Friday morning looks like a good bet with MRK, as the stock could break back through its 20-day moving average after 3 down days in a row in advance of earnings.