Merck Profit Beats Analysts’ Estimates on Research Cost Cuts

Apr 29, 2014 4:09 pm ET

(Updates with closing share price in sixth paragraph.)

April 29 (Bloomberg) -- Merck & Co., the second-biggest U.S. drugmaker by sales, beat analysts’ earnings estimates as the company cut spending on promotions and research.

First-quarter profit excluding certain items was 88 cents a share, 9 cents above the average of 16 analysts’ estimates compiled by Bloomberg. Sales were $10.3 billion, down from $10.7 billion, a year earlier, Merck, based in Whitehouse Station, New Jersey, said today in a statement.

The company last year said it would fire 8,500 workers in a move to save $1 billion, trimming research and development, sales and management. Those cuts showed up in the quarter’s results.

“Although the revenues were lighter than expected, Merck continues to impress with prudent expense management, particularly in R&D,” Alex Arfaei, an analyst with BMO Capital Markets Corp., said in a note to clients today.

Net income increased 7 percent to $1.71 billion, or 57 cents a share, from $1.59 billion, or 52 cents, a year earlier, the company said.

Merck shares rose 3.6 percent to $58.72 at 4 p.m. New York time. The stock had gained 23 percent in the last 12 months.

R&D costs fell 17 percent from a year before, to $1.57 billion, and marketing and administrative expenses dropped 8 percent to $2.73 billion.

“The prioritization process we introduced last year is clearly bearing fruit, as can be seen in the reduced R&D expenses,” said Roger Perlmutter, the company’s head of research, said on a conference call today.

Diabetes Drugs

Combined sales of Merck’s top product, the diabetes pill Januvia and related drug, Janumet, increased 3 percent to $1.33 billion from a year before. Overall pharmaceutical sales fell 5 percent to $8.5 billion.

In the U.S., Januvia sales benefited from price increases, as revenue from the drug grew 3 percent while prescriptions of declined, the company said.

“We’re looking to see if we can grow again,” said Adam Schechter, Merck’s vice president of global human health.

Merck’s most-promising pipeline drugs are a new cancer treatment that uses the body’s own immune system to fight the disease. It’s testing the medicine, MK-3475, in skin and lung cancers. It also has a therapy for hepatitis C that does away with side-effect heavy injections that are a staple of current treatments, and might eventually compete with offerings from Gilead Sciences Inc. and AbbVie Inc.

Non-Drug Units

Merck has been deciding the fate of two non-drug units that it says aren’t big enough on their own, meaning it needs either to sell them or buy something to bulk up. Its consumer-health business is for sale while the company determines the future of an animal-health unit.

Chief Executive Officer Ken Frazier said the company isn’t interested in large acquisitions, such as Pfizer Inc.’s $100 billion proposal to buy London-based AstraZeneca Plc.

“A major consolidation of the industry-type transaction is not our preferred strategy,” Frazier said on the conference call. Merck will look mostly at smaller deals, he said.