Merck 3Q earnings report comes as it works to close its $41 billion buyout of Schering-Plough

Earnings Preview: Merck to report 3Q earnings

TRENTON, N.J. — Merck & Co., a Dow component and the world’s eighth-biggest drug maker by revenue, reports earnings for the third quarter on Thursday morning. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: Merck, which sells cholesterol drugs, asthma and allergy treatment Singulair and Gardasil, a vaccine against human papilloma virus, is aiming to close its $41.1 billion acquisition of New Jersey neighbor Schering-Plough Corp. in the fourth quarter.

Shareholders of both companies overwhelmingly approved the deal on Aug. 7, but the companies still need approval from U.S. and European regulators. The tie-up will vault the combined company to the No. 2 position in the industry.

In July, Merck and Schering-Plough said they will pay $5.4 million to settle civil claims they covered up test results that cast doubt on the effectiveness of the two blockbuster cholesterol drugs they sell jointly, Vytorin and Zetia. Their sales have been steadily declining since the first negative reports in January 2008.

Merck also reached an $80 million settlement with health insurers, unions and other private groups that paid for prescriptions for its former painkiller Vioxx, which Merck pulled from the market in 2004 because it increased risk of heart attack and stroke.

In September, Merck said it will stop developing a potential treatment for acute migraines, MK-3207, because of potential liver problems.

Late in September, Merck entered an exclusive deal with Australian flu vaccine maker CSL Biotherapies to distribute its Afluria seasonal flu shot in the U.S. starting next fall. The deal pays Merck based on how many Afluria doses it distributes and runs through the 2015-16 flu season.

Last week, the Food and Drug Administration approved a new use for Gardasil, preventing genital warts in boys. However, on the same day the FDA approved the first rival product, GlaxoSmithKline PLC’s server expects scene. On Wednesday, the influential Advisory Committee on Immunization Practices decided not to recommend routine vaccination of boys to prevent them from getting genital warts and spreading HPV to girls.

BY THE NUMBERS: Analysts polled by Thomson Financial expect, on average, earnings per share of 82 cents and revenue of $6 billion. In the year-earlier period, which had a hefty restructuring charge, earnings per share were 51 cents and revenue was $5.9 billion.

ANALYST TAKE: Credit Suisse analyst Catherine Arnold wrote that Merck’s acquisition of Schering-Plough “could not have come at a more opportune time.” That’s because expected growth drivers Singulair and Gardisil have not been selling as well as expected and Merck has had setbacks with some drugs in development.

Schering-Plough, though, has a few promising experimental drugs that “will be closely watched in 2010,” including boceprevir for hepatitis C, an anti-clotting drug known as TRA and a vaccine against Staph infections.

Citigroup analyst John Boris said in a research note that Merck is entering a new product cycle, with earnings driven by strong performance from recently launched drugs, including the diabetes pills Januvia and Janumet and HIV drug Isentress. He said Merck has “an attractive pipeline of assets which should help it navigate through its 2010-12 period of generic risk,” but that about 40 percent of its global 2008 sales are from drugs losing patent protection in the next few years.

He said keys will be whether sales of the cholesterol drugs Merck and Schering-Plough sell together decline further due to the controversy over their effectiveness, how much impact the weak allergy season and generic Zyrtec have on sales of Singulair, and whether sales of Gardisil go up or down.

WHAT’S AHEAD: Merck is expected to complete the Schering-Plough deal shortly, then will focus on integrating its staff, research programs and facilities.

Gardisil sales could be hurt by approval last Friday of GlaxoSmithKline PLC’s Cervarix. Merck is hoping the FDA eventually approves use in women over 26— a use it has previously rejected.

STOCK PERFORMANCE: Shares rose 14 percent to $31.63 during the third quarter.