Merck & Co. posted a 90 percent drop in third-quarter profit, due to large charges for its $41.1 billion acquisition of Schering-Plough Corp. last November and a legal reserve for a federal investigation.
Also, Merck had a $2.8 billion gain a year ago from selling its animal health business to win antitrust approval to buy Schering-Plough, which also makes veterinary medicines.
The world's second-biggest drugmaker by revenue had net income in the quarter of $341.6 million, or 11 cents per share. That's down from $3.42 billion, or $1.61 per share, a year earlier.
One-time charges totaled $2.3 billion after taxes. Those include $1.54 billion in inventory-related accounting adjustments, $384 million for restructuring due to the merger, $64 million in other merger costs and the $950 million legal reserve.
Merck, based in Whitehouse Station, N.J., said it's taking the reserve to cover the expected resolution of a previously disclosed probe by the U.S. Attorney's Office in Boston related to its practices in marketing its former painkiller Vioxx. Discussions are continuing.
Excluding the 74 cents in one-time charges, Merck would have made 85 cents a share, 3 cents more than analysts expected.
Analyst Timothy Anderson of BernsteinResearch, in a note to investors, attributed that to Merck's tax rate and expenses being slightly lower than expected and its income from partnerships slightly higher than expected. He called the results "decent."
Merck, which makes Januvia for diabetes and Singulair for asthma and allergies, said its revenue was $11.12 billion, up 84 percent from $6.05 billion in 2009's third-quarter, when it didn't have revenue from Schering-Plough products such as hepatitis and fertility drugs and consumer products including the Dr. Scholl's foot care line.
Analysts were expecting slightly higher revenue of $11.24 billion.
"I'm extremely pleased and proud of what we've achieved in such a short time," Chief Executive Richard Clark told analysts during a conference call.
Investors were not as happy, driving Merck shares down 55 cents, or 1.5 percent, to $36.39 in late-morning trading.
Sales of prescription drugs totaled $9.7 billion, down 4 percent from the two companies' combined sales in 2009's third-quarter.
That's because sales of about two-thirds of the prescription drugs were down, led by a 51 percent plunge in sales of the popular blood pressure drugs Cozaar and Hyzaar. Combined, they had been Merck's second-biggest seller, but recently they got generic competition.
Like other major pharmaceutical companies this quarter, Merck said sales were hurt by generic competition, unfavorable exchange rates and pressure to reduce prices from European government health programs. In Europe, health care officials have adopted austerity measures to reduce deficits from the global recession.
Merck also said that higher Medicaid rebates required under the new U.S. health care law cut sales by $43 million in the quarter. Other companies have noted a similar effect. The world's biggest drugmaker, Pfizer Inc., releases its results on Tuesday, the latest major company to report.
Merck said that without the drop in Cozaar and Hyzaar revenue, to $423 million from $861 million, and a 1 percent hit from unfavorable exchange rates, sales would have been up 2 percent.
Looking ahead, the company raised the lower end of its range for full-year earnings 2 cents per share, to $3.31 to $3.39, excluding items. Analysts expect $3.36 per share. Including items, Merck expects 66 cents to 97 cents a share.
Clark said the combined company has driven the growth of key products, expanded its geographic reach, advanced what he called a "tremendous late-stage pipeline," reduced costs and integrated its staff and systems. He said Merck is on track to achieve $3.5 billion in annual savings by the end of 2012.
He noted Merck gets 18 percent of revenue from emerging markets and is aiming for 25 percent by 2013.
Those markets, including big countries with a rising middle class such as China, India and Russia, are key targets for most drugmakers as revenue growth levels off in the U.S. and Europe.
Prescription drug sales were driven by a 12 percent jump by top seller Singulair, to $1.22 billion, and higher sales of rheumatoid arthritis drug Remicade at $661 million, plus a combined 28 percent jump in sales of diabetes drugs Januvia and Janumet, to $847 million.
Sales of Schering-Plough's veterinary medicines were up 3.5 percent from a year ago at $687 million. Consumer health products, including nonprescription Claritin allergy pills and the Coppertone sun-care line, were up nearly 3 percent at $291 million.
Company executives noted several new product launches are coming soon in various countries and key data on some promising drugs in mid-stage testing will be released shortly.
Analysts asked repeatedly about delays in Merck's arbitration with Johnson & Johnson over rights to roughly $2 billion in annual sales for Remicade and a successor drug, Simponi, that J&J sells jointly with Schering-Plough. Merck said in early September a decision could come by late October, but now new oral arguments are set for late December, with no decision until 2011.
Chief Financial Officer Peter Kellogg said it's not unusual for parties in arbitration to change the process. Clark said he's confident Merck will retain that revenue.
For the first nine months, Merck said it earned net income of $1.39 billion, or 44 cents per share, down 78 percent from $6.41 billion, or $3.03 per share, in the same time last year. Revenue totaled $33.89 billion, nearly double the $17.3 billion in the first nine months of 2009.