Ahead of the Earnings: Merck Gaining Respectability Again?

We can see the sweat on their brow, but all in all Merck (MRK) is running a pretty good race these days going into Thursday’s earnings.  With the recent pop from news that the Vioxx class action suit is out, MRK shares are back to where they were before the whole blow up happened.  Friday’s rather embarrassing news aside, this stock can almost be evaluated on its merits these days.

Today shares are tapping on the $50.00 level, up 15% in just the past month on massively increased guidance.  Estimates for the full year have gone from $2.36 – $2.49 in January to $2.75 – $2.85 as of Friday’s “pre-announcement”.  Estimates for the 1^st quarter were for $0.63, but management said on Friday to expect $0.78, or $0.84 per share excluding charges for restructuring.

That the company could increase earnings in this particular year would be a feat, as the $4.4 billion in annual sales from Zocor was put in the piñata last June when the drug went off patent.  Good things are expected from new entry Janumet (a DPP-4 inhibitor for diabetes), which will be first-to-market for a while now that Novartis has had its entry put on the shelf indefinitely. 

HPV vaccine Gardasil is also gaining a lot of traction, as Merck’s lobbying efforts have paid off and more than two dozen states are considering following in Texas’s footsteps.  In the 4^th quarter the drug had sales of $155 million, up over 100% sequentially. 

The drugs that will be carrying the load in the short-term will still be the cholesterol ventures Zetia (expected to grow about 35%) and Vytorin (expected to grow about 60%).

Based on the new guidance figures, the company is trading at 17.5x earnings.  If the “intrinsic cost” of Vioxx litigation continues to drop (they are winning over 75% of cases thus far) and the pipeline holes start to have real contenders to fill them, we could see earnings estimate having further upside from here.

Ryan Barnes

April 17, 2007

Ryan Barnes can be reached at [email protected]; he does not own securities in the companies he covers.