U.S. News

Merck Reaffirms '06 Earnings Targets


Merck is standing by its forecast of flat earnings for 2006 and
projected slightly higher 2007 results, in line with Wall Street expectations, as the drugmaker grapples with generic competition for a number of its medicines.

During a conference call this morning, Merck said it expects 2007 earnings per share of $2.51 to $2.59, excluding restructuring charges related to site closures and job cuts.

The prediction squares with the $2.56 average forecast of analysts polled by Thomson Financial.

Deutsche Bank analyst Barbara Ryan said she believes Merck has issued a conservative 2007 forecast that will likely be lifted during the year -- just as the drugmaker repeatedly
raised its 2006 outlook.

"(In 2006), Merck raised guidance three times and has handsomely executed on a strategy to, in our opinion, understate and overperform," Ryan said in a research note. Ryan stuck to her "buy" rating on the stock.

CNBC's Mike Huckman notes Merck also gave 2007 sales guidance for some of its top-selling drugs. A sharp drop in Zocor sales is expected because it recently went generic. But Merck is also forecasting a decline in sales of the osteoporosis drug Fosamax and small increases in sales of the allergy asthma drug Singulair. Vaccines will also contribute significantly to the top line in 2007.

It previously forecast 2006 earnings per share of $2.48 to $2.52, excluding special items. That compares with a 2005 profit of $2.51 a share.

Merck's 2006 and 2007 projections do not reflect reserves for potential liability to tens of thousands of people that have filed lawsuits alleging harm from the company's Vioxx arthritis drug, which was withdrawn in 2004 after being linked to heart attacks.

Chief Executive Officer Richard Clark said investors can expect Merck to return to compound annual "double-digit" earnings growth in 2010, as sales of new drugs expand and job cuts and other restructuring moves produce cumulative cost savings of $4.5 billion to $5 billion from 2006 to 2010.

"Beyond 2010 we expect to deliver sustained revenue and earnings growth fueled by our growing pipeline" of experimental medicines, Clark said in a release.

Clark, the former head of manufacturing at Merck, took charge of the company in May 2005 at a time when its sales and profits were reeling from the loss of Vioxx, which had boasted
annual revenue of $2.5 billion.

"We expect bottom-line earnings growth to begin in 2007," excluding special items, Chief Financial Officer Judy Lewent said.

Merck expects compound annual profit growth of 4% to 6% from 2005 to 2010, and aims to modestly boost its annual research spending over the period, Lewent said. But she said Merck will hold the line on marketing and administrative expenses, keeping them flat in 2010 with 2006 levels.