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Originally published Wednesday, May 1, 2013 at 4:29 AM

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Generic competition cuts Merck's Q1 sales, profit

Merck & Co. on Wednesday posted disappointing first-quarter results and cut its earnings forecast for the year. But the world's third-largest drugmaker predicted that things would soon improve.

AP Business Writer

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Merck & Co. on Wednesday posted disappointing first-quarter results and cut its earnings forecast for the year. But the world's third-largest drugmaker predicted that things would soon improve.

Merck was slammed by two factors plaguing most of its rivals: growing competition from generic drugs and unfavorable exchange rates.

Major drugmakers in recent years have been hurt by an unprecedented wave of patent expirations on brand-name drugs that had brought in billions each year. This has enabled makers of generic drugs to grab customers with cheaper, copycat versions.

Additionally, pharmaceutical companies are being pinched by the dollar gaining ground overseas. Since drugs and other products are bought in local currencies, when the dollar's value rises, revenue from those countries falls.

Merck, which is based in Whitehouse Station, N.J., said its revenue was reduced by 2 percent because the dollar rose sharply against the yen in Japan - a key market - and against some other currencies.

That and all the generic competition combined to reduce Merck's revenue by 9 percent. Net income fell 8.3 percent.

CEO Kenneth Frazier said he expects better results in the second half of the year. And he noted that Merck has five drugs under review by regulators, including a promising insomnia medicine called suvorexant.

"We fell short of our expectations for the top line," Frazier told analysts on a conference call. "We knew that 2013 would be challenging, but we are confident in Merck's future."

This isn't the first time generic rivals have cut Merck's revenue, but it might be the worst.

In the first quarter, recent generic competition slashed sales of baldness treatment Propecia, allergy pill Clarinex, migraine drug Maxalt and, worst of all, Singulair. The asthma and allergy pill had been Merck's top seller for several years, but its U.S. patent expired last August. Most patients quickly defected to the slew of much-cheaper generic versions.

As a result, Singulair plunged 75 percent in the first quarter, down by $1 billion to $337 million.

"We haven't seen such rapid loss (in sales as) we've seen with Singulair," said Adam Schechter, Merck's head of prescription drug marketing.

Still, analysts seemed more concerned that sales of Type 2 diabetes pill Januvia declined by 4 percent to $884 million.

Januvia is now Merck's biggest seller and a crucial driver of growth. Revenue from Januvia had been growing rapidly, fed by the worsening global epidemic of obesity-related diabetes, but the company said wholesalers reduced inventory in the first quarter.

"The market is very competitive," Schechter added. "We are seeing rebate and pricing pressures as newer competitors seek to increase their market share" by offering health plans bigger discounts and rebates.

Merck said Wednesday that many sales representatives who promote multiple drugs to doctors now will focus solely on the Januvia franchise. Executives predicted mid-single-digit revenue growth in the U.S. and higher growth elsewhere for the rest of the year.

Merck on Monday announced a partnership with Pfizer Inc. to develop a diabetes drug that works differently than Januvia, as a solo treatment and in combination with other drugs. Management said Wednesday that the drug could complement Januvia, as most diabetes patients must add additional drugs over time to control blood sugar, before having to start insulin shots.

Overall, revenue in the first quarter was $10.67 billion, down from $11.73 billion. That's well below the $11.11 billion analysts anticipated.

Total prescription drug sales fell 12 percent to $8.89 billion. Sales of veterinary medicines rose 2 percent to $840 million and sales of consumer health products such as the Coppertone sun care line increased 3 percent to $571 million.

Despite the revenue declines, Merck noted strength in revenue from some of its drugs: Simponi and Remicade for immune disorders, HIV drug Isentress and vaccines, particularly Gardasil for preventing sexually transmitted diseases. Revenue from emerging markets such as China also was strong.

Merck earned $1.59 billion, or 52 cents per share, down from $1.74 billion, or 56 cents per share, a year earlier. Excluding $992 million in one-time items, mostly acquisition and restructuring charges, profit was down 15 percent to $3.59 billion, or 85 cents per share. That was a nickel better than analysts expected.

Frazier said the company's stepped-up cost cutting kept the bottom line from sagging even more during the quarter.

Meanwhile, Merck said it now expects 2013 earnings per share of $3.45 to $3.55, excluding one-time items. In February, it forecast $3.60 to $3.70 per share.

Merck also announced plans to buy back up to $15 billion in shares, half in the next 12 months. That's on top of $772 million in share repurchases from January through April under a prior buyback that has another $1.1 billion to spend.

Frazier said the timing of the buyback was coincidental. Other drugmakers likewise have been buying back shares, although drug stocks have had a significant run-up in the last year or so after languishing for several years. Merck shares climbed from just under $30 in August 2011 to a high of $48.79 last month - barely half the October 2000 all-time high of nearly $94.

A huge sell off cut Merck's stock price by 5.1 percent in premarket trading before bargain seekers pushed it back up somewhat. Shares closed down $1.32, or 2.8 percent, at $45.68. More than 37 billion shares changed hands, more than double the average daily volume.

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Linda A. Johnson can be followed at http://twitter.com/LindaJ-onPharma

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