Merck & Co. (MRK - Analyst Report) reported third quarter 2014 earnings of 90 cents per share, beating the Zacks Consensus Estimate of 88 cents. Earnings, however, declined 2.2% from the year-ago period.

Merck & Co, Inc - Earnings Surprise | FindTheBest

Revenues for the quarter declined 4.3% to $10.557 billion, just shy of the Zacks Consensus Estimate of $10.689 billion.

Including one-time items, third quarter 2014 earnings fell 18.4% to 31 cents per share.

Revenues Hit by Generics

Merck’s Pharmaceutical segment posted revenues of $9.1 billion, down 4%.

Products like Janumet/Januvia, Simponi, Dulera and Remicade performed well. However, the strong performance of these products was offset by lower revenues of Isentress, Gardasil, Singulair, Nasonex, Victrelis, PegIntron, Cozaar/Hyzaar, and Temodar.

While products like Nasonex, Temodar, Singulair and Cozaar/Hyzaar were affected by generics, higher competition impacted Victrelis and PegIntron sales.

Remicade and Simponi combined revenues increased 11% to $774 million with some help from currency (2%). Performance was boosted by Simponi’s launch in additional countries and continued growth in existing markets. Approval for an additional indication in ulcerative colitis could drive sales further.

Isentress, the company’s product for HIV infection, recorded revenues of $412 million, down 3%, in the reported quarter mainly due to lower sales in the U.S., partially offset by growth in Europe.

The diabetes franchise, consisting of Januvia and Janumet, witnessed 5% growth in revenues which came in at $1.4 billion. Higher sales in the U.S. and Europe were partially offset by weakness in Japan.

Gardasil, Merck’s cervical cancer vaccine, recorded revenues of $590 million, down 11% year over year, reflecting lower purchases in the U.S. public sector.

Merck’s ProQuad, MMR II and Varivax vaccines combined revenues remained flat at $421 million. Vytorin revenues declined 6.8% to $369 million during the quarter.

Merck’s hepatitis C virus (HCV) treatment, Victrelis posted revenues of $27 million, down 77.7% from the year-ago period. Revenues continue to be affected by the entry of Sovaldi as well as contraction in several markets due to warehousing and a large number of clinical trials.

Merck’s animal health segment posted revenues of $885 million, up 11%.

Consumer Care revenues declined 9% to $401 million in the third quarter of 2014. The company sold its Consumer Care business to Bayer (BAYRY - Analyst Report) on Oct 1.

Marketing and administrative expenses declined 5.4% to $2.6 billion in the third quarter of 2014 due to productivity measures undertaken by the company. R&D spend decreased 6.6% to $1.5 billion in the third quarter of 2014.

Narrows 2014 Guidance

Merck expects to earn $3.46 - $3.50 per share on revenues of $42.4 billion - $42.8 billion (old guidance: $3.43 - $3.53 per share on revenues of $42.4 billion - $43.2 billion). The Zacks Consensus Estimate of earnings of $3.48 per share and revenues of $42.5 billion is within the guidance range.

Merck expects R&D as well as marketing and administrative spend to decline from 2013 levels. The company spent $7.1 billion and $11.7 billion on R&D and marketing and administrative matters, respectively, in 2013.

Our Take

Merck’s third quarter results were mixed with the company beating on earnings but missing on revenues. Although revenues declined from the year-ago period, cost control efforts helped the company record growth in earnings.

Like many other pharma companies, Merck’s revenues are being hit by genericization. With Singulair and a few other products facing generic competition, we expect the top-line to remain under pressure. The company will continue to look toward cost-cutting initiatives and share buybacks to drive the bottom-line.

We are also positive on Merck’s efforts to expand its pipeline and to focus on its core areas of expertise. The company recently acquired Idenix – this acquisition will help Merck boost its HCV portfolio. Merck also gained FDA approval for Keytruda making it the first approved anti-PD-1 therapy in the U.S. Merck said that 900 of the 1,200 patients who may be eligible for Keytruda are already on the treatment.

Merck is a Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the health care sector include Biogen (BIIB - Analyst Report) and Allergan (AGN - Analyst Report). While Biogen is a Zacks Rank #1 (Strong Buy) stock, Allergan is a Zacks Rank #2 (Buy) stock.