Shares of drugmaker Merck & Co. surged over 4 percent to a new high for the year Friday as its second-quarter results easily beat Wall Street expectations — just as generic competition is set to start decimating sales of its top-selling medicine, Singulair.
The world's third-biggest drugmaker by revenue maintained its profit forecast despite net income dropping 11.4 percent as higher sales were offset by unfavorable currency rates and acquisition and restructuring costs. Still, adjusted profit was up 9 percent, and it was Merck's sixth straight quarter with revenue and adjusted income both up.
The maker of diabetes pill Januvia and asthma and allergy medicine Singulair said net income was $1.79 billion, or 58 cents per share. That was down from $2.02 billion, or 65 cents per share, a year earlier, when results were boosted by a one-time, $700 million tax settlement gain.
Excluding $1.71 billion in one-time charges, income was $3.23 billion, or $1.05 per share, up from $2.95 billion, or 95 cents per share. That beat expectations of $1.01 per share, according to FactSet.
Revenue rose 1.3 percent to $12.31 billion, exceeding expectations of $12.15 billion. Merck noted unfavorable currency exchange rates, mainly due to the weak euro, reduced total revenue by 4 percent.
Edward Jones analyst Linda Bannister called it a "very strong quarter for Merck, as sales in new and existing drugs continue to outperform, supported by the consumer health and animal health businesses."
"We continue to believe that long-term growth will be primarily driven by the company's drug pipeline," she added, noting that during the quarter Merck got positive late-stage study results for HIV drug Zolinza and a new osteoporosis drug, odanacatib, "which had such strong results that the trial was able to end early."
During a conference call, CEO Kenneth Frazier told analysts Merck is on track to apply for regulatory approval of six experimental drugs over the next 18 months, including odanacatib and new medicines for high cholesterol, insomnia and cancer.
Pharmaceutical sales rose 2 percent, to $10.56 billion.
Singulair saw sales rise 6 percent to $1.43 billion in its last quarter before U.S. generic competition arrives on Aug. 3. Merck said it expects multiple generic versions of Singulair to hit drugstores next Friday, and 90 percent of sales to evaporate within two months. Singulair had $5.5 billion in global sales last year, about 70 percent of that in the U.S.
Sales of Januvia and combo pill Janumet both jumped about 30 percent, to $1.06 billion and $411 million, respectively. That franchise is a key Merck focus as the global epidemic of Type 2 diabetes worsens. The two drugs now grab 75 percent of sales in their category, DPP-4 inhibitors, which both increase the insulin made by the pancreas and decrease the sugar made by the liver.
Cholesterol drugs Zetia and Vytorin brought in a combined $1.08 billion, up nearly 3 percent; HIV drug Isentress brought in $398 million, up 17 percent; and immune disorder drug Remicade posted $518 million in sales, down 38 percent. That drop is due to a revised agreement with Johnson & Johnson reducing the countries in which Merck has rights to sell the biologic drug, the result of arbitration.
Several older drugs with generic competition saw sales continue to decline, including ex-blockbusters Fosamax for osteoporosis and blood pressure drugs Cozaar and Hyzaar.
"Merck is the 'few surprises Steady Freddy' of Big Pharma," said analyst Erik Gordon, a professor at University of Michigan's Ross School of Business. "Its top sellers are doing what was expected of them, and expenses are generally in line, with just a little extra spending on research and development."
Sales of veterinary medicines climbed 8 percent to $865 million, and sales of consumer health products such as the Coppertone sun care line edged up 2 percent to $552 million.
Merck still expects revenue for the year to be about the same as 2011's $48.04 billion. That's despite that huge hit to Singulair, the impact of unfavorable exchange rates and ongoing austerity measures in Europe, where government health programs continue to push for slight price decreases each year.
Credit Suisse analyst Catherine Arnold wrote to investors that she was "comforted by the fact" Merck maintained its 2012 profit forecast despite those pressures.
Merck expects profit of $2.04 to $2.30, or $3.75 to $3.85 per share excluding charges. Analysts expect $3.82 per share.
"It is hard to find anything wrong with the quarter," Arnold wrote.
Merck shares rose $1.76, or 4.1 percent, to close at $45.10 Friday. Shares have been climbing sharply since June 1, when they were at $37.18, and passed the prior 52-week high of $44.37.