Merck & Co Reports 7% Topline Growth in Q2, Signs Pact with MorphoSys

United States pharma major Merck & Co has announced financial results for the second quarter and first half ending 30 June 2011, with total sales up by 7% year on year (y/y) and 4% y/y, respectively. Global sales of USD12.15 billion in the second quarter also marked the highest quarterly sales total for the combined company (Merck and Schering Plough) so far. The firm's pharmaceutical business dominated top-line contributions with a similar growth rate as that of total sales in the second quarter (i.e. 7% y/y, to USD10.36 billion). Animal Health sales totalled USD802 million, up 10% y/y in the second quarter, with an 8% contribution from foreign exchange. Consumer Care sales dipped by 1% y/y in the second quarter, reflecting the decline in Claritin (loratadine) sales, which was attributed to a "weak allergy season'".

In terms of the expenditure structure, the cost of sales and research and development continued to decline. This drop is being attributed to the company's cost-saving measures. The firm's commercialisation initiatives, however, have meant that marketing and administration costs have remained high, achieving an 11% and 5% y/y rise in the two periods under review. Merck said that it has gained a net favourable impact of USD700 million relating to the settlement of the firm's federal income-tax audit for 2002–05. Combined with USD230 million in foreign and state tax-rate changes, the firm's profits have grown. Operating income was higher by 69.23% y/y in the second quarter, and by 93.77% y/y in the first half. Margins were also up appreciably in the two periods under review.

In terms of product performance, strong sales of Januvia (sitagliptin), Janumet (sitagliptin + metformin hydrochloride), Remicade (infliximab), Singulair (montelukast sodium), Isentress (raltegravir), Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant), and Zostavax (zoster vaccine live) primarily aided in the overall sales growth. Pharmaceutical sales from emerging markets accounted for 18% of sales in the second quarter. Individual strong product sales included global sales of Remicade, which grew 26% in the second quarter, due to growth in Europe, Canada and the emerging markets, as well as increases in gastrointestinal indications for the treatment of ulcerative colitis and Crohn's disease, the company said. Under an agreement reached in the second quarter, Merck has transferred exclusive marketing rights for Remicade and Simponi (golimumab) to Johnson & Johnson (US) in territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific, effective from 1 July 2011. Merck retains exclusive marketing rights to these products throughout Europe, Russia and Turkey, which has contributed to the higher sales figures.

Job Cuts

In a related development, Merck also announced that it will cut 13,000 jobs. The figure, when combined with the earlier layoffs of 17,000, would see the firm trim its employee count by 30,000 positions. Merck has said that the figure could be offset by some hires, however. The move will effectively cut Merck's work force by 30%, and is due to be completed by 2015 (source: Wall Street Journal).

Deal with MorphoSys

The firm has entered into a deal with research and diagnostic antibody unit AbD Serotec for the use of MorphoSys's HuCAL Gold technology in the field of vaccines. Under the terms of the agreement, Merck is granted access to HuCAL GOLD for research purposes, with the option to upgrade to MorphoSys's latest proprietary antibody library HuCAL PLATINUM. MorphoSys's research and diagnostic antibody segment AbD Serotec will receive annual user fees from Merck for access to the HuCAL technology, and licence fees for clinical-monitoring reagents. The new deal is essentially an amendment of an existing arrangement between the two firms.

Outlook and Implications

The financial performance of Merck & Co in the first half of the year has ended with robust results, which is a combination of its cost-saving measures and other tax elements that boosted its profitability. Going forward, however, the firm will need to seek to focus on its new product commercialisation efforts to sustain revenue growth. Towards this, the firm has received a setback recently, with the FDA issuing a complete response letter for an extended-release formulation of Janumet. The delay could be temporary, however, as the approval was not related to additional clinical trials and hence is expected to be resolved in the short term. Merck also stopped further clinical development of its experimental migraine drug telcagepant, which was in Phase III after review, not expressing the reasons behind it. On the positive front, Merck's Victrelis (boceprevir) was approved in the US and Europe, and its commercialisation is ongoing; the firm also received approval from the Japanese Ministry of Health for three drugs recently, bolstering its revenues from that market.

In terms of cost-saving measures, the initiatives are tied to the firm's financial targets for the short-to-medium term. By the end of 2015, Merck now expects the overall Merger Restructuring Programme to yield annual ongoing savings of USD4.0–4.6 billion, from the original estimate of USD2.7–3.1 billion, and remains on track to achieve its goal of USD3.5 billion in annual cost synergies by the end of 2012. Full-year 2011 revenue is expected to grow in the low-to-mid single-digit percent range, from a base of USD46.0 billion in 2010.