Merck, Schering-Plough's Q2 Results Indicate Challenges Ahead

The second quarter of 2008 remained challenging for U.S. firms Merck & Co and Schering-Plough. Merck reported a sales growth dip of 1% year-on-year (y/y), with U.S. sales falling by 10% y/y to US$3.3 billion. Although the firm has been able to reduce its expenditure on material and production and marketing and administrative costs, R&D charges were up by 13%, representing 19.3% of overall sales. Marketing expenses included a provision of US$210 million for Vioxx (rofecoxib) litigation. Restructuring costs were at US$102 million, up by 83% y/y, reflecting primarily on employee separation costs.

Schering-Plough, on the other hand, has received ample support from its acquisition of Organon Biosciences (OBS), widening its portfolio and geographical strengths. The company's consumer healthcare and animal health business also contributed to its top-line growth, growing by 210% y/y. Sales of global pharmaceuticals for the second quarter stood at US$3.7 billion. The acquisition of OBS added US$921 million in net sales. Comparing the cost elements, cost of sales rocketed by 95.2% y/y, while selling, general and administrative (SGA) expenses were up by 37.7%, mainly due to the impact of the acquisition and foreign exchange. R&D spend was also higher due to the inclusion of US$60 million towards upfront payments to licensing transactions. Net income dropped by 19.1% y/y to US$436 million.

The cardiovascular franchise of the two firms has reported sales of US$1.1 billion, representing a drop of 9% y/y. The two firms hold a 50-50 equity in the joint venture (JV). A clinical study known as the Simvastatin plus Ezetimibe in Aortic Stenosis (SEAS) reported findings that did not support the objective of lowering cholesterol in people with partial blockage of heart valves. Businessweek reported that the results also indicated a statistically significant increase in cancer in patients using Vytorin.

In terms of product performance, Merck's Cozaar/Hyzaar, Arcoxia, Isentress, and Januvia contributed with higher growth. Worldwide sales of Fosamax were hampered by generic competition, with a drop of 48%. Vaccine sales were up, mainly due to Zostavax and Rotateq, which contributed US$66 million and US$178 million, respectively while Gardasil reported drops of 9% and 11% in global and U.S. sales, respectively. For Schering-Plough, Remicade, Nasonex, Temodar, and Claritin represented higher growth.

Outlook and Implications

The performance of the two firms relates pressure on new product growth. Merck's vaccine franchise as well as its Singulair and Cozaar revenues will continue to lead the table. Gardasil sales are under pressure as rival firm GlaxoSmithKline's (GSK; U.K.) Cervarix gains reimbursement from five European nations. In terms of costs, the company's restructuring efforts will be higher as manufacturing site closures and employee layoffs continue. Schering-Plough, on the other hand, will step ahead with the integration of OBS. The company has announced initiation of Phase III studies of boceprevir in patients who are chronically infected with genotype hepatitis C virus 1. Furthermore, the European Medicines Agency's (EMEA) Committee for Medicinal Products for Human Use (CHMP) is expected to recommend sugammadex for marketing approval shortly.

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