UBS And Its Guarded Outlook For Merck's Gardasil


Shares of Merck, which have lost more than a third of their value so far this year, are under continued pressure this morning. They were at 60 bucks in early January.

Today they're trading around $37. Big pharma analyst Rupesh Patel at UBS is downgrading the Dow component from Buy to Neutral because he thinks it's gonna be "range-bound near-term" and he's cutting his price target from $43 to $40.

On the one hand, Patel writes that MRK "is among the most innovative and best managed companies in the sector." But on the other hand, he wants to see evidence of long-term revenue growth prospects, does not see near-term earnings upside and believes that sales of the company's cervical cancer vaccine Gardasil could be "roughly flat" between the first quarter and the second quarter. Merck reports earnings on July 21st.

Specifically, Patel is slashing his second-quarter Gardasil sales estimate from $380 million to $300 million. "We're nervous on this front," he wrote in the research note to clients. Merck sold $293 million worth of the the vaccine in the first quarter. Patel's basing his forecast on data from IMS Health which monitors prescription trends for the industry and Wall Street. Patel points out that MRK has cautioned analysts in the past from relying on IMS' numbers for Gardasil to build their models, but he adds that over the past year the IMS data has been pretty darn close to the actual reported sales number.

On the plus side, though, Patel says his Q2 Gardasil sales projection assumes the product will have had its best sales month ever in June. Maybe that's due to pre-back-to-school buying or stockpiling of the shots. He also notes that Merck's new diabetes drugs Januvia and Janumet remain solid growth drivers and that sales of the embattled cholesterol drugs Vytorin and Zetia, which MRK shares with Schering-Plough, have stabilized over the past two-and-a-half months. But in addition to Gardasil, Patel--and many other analysts, for that matter--is also concerned about falling prescriptions for MRK's top-selling drug, Singulair, for asthma/allergies in the wake of reports about a potential suicide risk.

Merck recently suffered a regulatory setback when the FDA delayed a decision on whether to approve Gardasil for older women. But it got a competitive boost when GlaxoSmithKlineannounced last month that it's pushing out the timeline for potential approval of its similar vaccine, Cervarix. Merck is also moving ahead with plans to file for the FDA OK to sell Gardasil for young men and boys who can carry the sexually-transmitted virus that's the leading cause of cervical cancer.

UBS has done investment banking for MRK and makes a market in the stock.