The Zacks Analyst Blog Highlights: Chevron, Merck & Co., Johnson & Johnson, Vertex Pharmaceutical and Roche

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Oct 31, 2011, 09:30 ET

CHICAGO, Oct. 31, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Chevron Corp. (NYSE: CVX), Merck & Co. (NYSE: MRK), Johnson & Johnson (NYSE: JNJ), Vertex Pharmaceutical (Nasdaq: VRTX) and Roche (OTC: RHHBY).

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Here are highlights from Friday's Analyst Blog:

Chevron Beats on Top & Bottom Lines

U.S. energy giant Chevron Corp. (NYSE: CVX) reported bright third-quarter 2011 results, riding on the back of higher oil prices and stronger refining margins.

Earnings per share (excluding adjustments for foreign-currency effects) came in at $3.69, handsomely above the Zacks Consensus Estimate of $3.42 and the year-ago adjusted profit of $2.06.

Quarterly revenue of $64,432 million was 29.6% higher from the prior-year quarter result of $49,718 million and was 14.7% above our projection.

Chevron hiked its quarterly dividend 3.8% sequentially to 81 cents per share or $3.24 per share annualized.

Outlook

Chevron's production outlook remains promising, with a number of major deepwater projects scheduled to come online during the next few years. The company's prominent Wheatstone liquefied natural gas ("LNG") venture in Australia has received the necessary government approvals.

We believe that Chevron – with its Wheatstone project coupled with the other major Gorgon Project – will hold the leadership position among natural gas and LNG suppliers in the Asia-Pacific belt. These massive resource ventures aim at providing considerable economic benefits such as employment, government revenue and local business opportunities.

We also appreciate Chevron's initiatives to trim its less lucrative refining/marketing operations and concentrate on the high profit generating exploration and production business. In this regard, the company is already in the process of selling various downstream properties in more than 20 counties, including Spain, Caribbean and southern Africa.

Our Recommendation

Chevron is one of the largest integrated energy companies in the world and has an impressive business model. Its current oil and gas development project pipeline is among the best in the industry, boasting of large, multi-year projects. Additionally, Chevron possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.

However, due to its integrated nature, Chevron is particularly susceptible to the downside risk from continued weakness in the global economy. We are also concerned by the company's high level of capital spending and competition from peers. As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation.

Merck Beats, Updates Outlook

Merck & Co. (NYSE: MRK) reported third quarter 2011 earnings per share (excluding special items) of 94 cents, 3 cents above the Zacks Consensus Estimate and 10.6% above the year-ago earnings. Double-digit growth of key products and new product launches contributed to earnings growth.

Revenues for the quarter increased 8.1% to $12 billion, above the Zacks Consensus Estimate of $11.6 billion. While revenues were favorably impacted by foreign exchange fluctuations (5%), products like Januvia, Janumet, Singulair, Isentress, Gardasil, and Zostavax contributed strongly to sales. The strong performance of these products was partially offset by lower sales of Vytorin and Cozaar and Hyzaar. Remicade sales also declined during the quarter.

Results by Product

Singulair, indicated for the chronic treatment of asthma and relief of symptoms of allergic rhinitis, recorded $1.3 billion in sales, up 10% from the year-ago period.

Meanwhile, with Merck transferring exclusive marketing rights for Remicade and Simponi to Johnson & Johnson (NYSE: JNJ), Remicade sales fell 15% to $561 million. We expect Merck to focus on improving penetration rates and drive growth in Europe, Russia and Turkey.

Isentress, the company's product for HIV infection, recorded an increase of 23% to $343 million during the reported quarter. Growth was driven by demand in the US and Europe. Isentress' label was expanded in both Europe and the US in 2009 to include its use as a combination therapy for previously untreated patients. This should help drive sales. PegIntron, indicated for treating hepatitis C, posted sales of $163 million, down 3%.

Sales of Merck's antihypertensive medicines, Cozaar and Hyzaar, continued to decline during the third quarter. Sales came in at $404 million, down 4%. The decline was expected as these drugs lost marketing exclusivity in the US and major European markets in 2010. We expect sales to continue declining going forward. Temodar sales ($223 million, down 12%) also declined due to generic competition in Europe.

The diabetes franchise, consisting of Januvia and Janumet, continued to perform well, and witnessed growth across all regions. Combined sales increased 41% to $1.2 billion. While Januvia sales increased 41% to $846 million, Janumet sales increased 42% to $350 million. Merck is working on increasing sales of its diabetes franchise by gaining approval for additional indications. The diabetes franchise should benefit from the recent approval of Juvisync, which is a combination of Januvia and Zocor.

Gardasil, Merck's cervical cancer vaccine, continued to perform well with sales coming in at $445 million, up 41% year over year. Sales were driven by increased vaccination of males and females and the launch in Japan. Zostavax sales came in at $108 million with performance being driven by an improvement in the supply situation. Merck expects the backorder situation to continue until it has sufficient inventory levels to meet demand.

Meanwhile, Merck's ProQuad, MMR II and Varivax vaccines recorded combined sales of $391 million, down 10%.

Merck provided an update on its recently approved hepatitis C treatment, Victrelis (boceprevir). Sales increased to $31 million, up from $21 million reported in the second quarter of 2011. Although sales improved on a sequential basis, we note that Victrelis is lagging significantly behind Vertex Pharmaceutical's (Nasdaq: VRTX) Incivek, which posted third quarter 2011 sales of $419.6 million.

Merck has an agreement with Roche (OTC: RHHBY) for the global marketing of Victrelis as part of a triple combination therapy. Victrelis is approved in the US, EU and Brazil.

Merck's animal health segment posted sales of $826 million, up 20%. Increased sales of new products in cattle, swine and poultry helped drive growth.

Consumer Care sales increased 3% to $421 million in the third quarter of 2011, mainly due to higher sales of Miralax and Zegerid OTC. Both animal health and consumer care sales were positively impacted by foreign currency fluctuations.

Guidance Updated

With the release of third quarter results, Merck updated some components of its guidance. The company raised the lower end of its earnings guidance range and now expects adjusted earnings in the range of $3.72 - $3.76 (old guidance: $3.68 - $3.76) in 2011. The Zacks Consensus Estimate of $3.73 is within the company's revised outlook.

Merck reduced its R&D guidance again and now expects R&D spend in the range of $7.8 billion - $8.0 billion (old guidance: $8.0 billion - $8.3 billion). The company will provide an update on its pipeline in November 2011.

Merck expects 2011 revenue to grow in the mid-single digit percent range (old guidance: low to mid single-digit percent range) year over year.

Neutral on Merck

We currently have a Neutral recommendation on Merck, which carries a Zacks #3 Rank (short-term Hold rating). While headwinds remain in the form of patent expirations of key drugs, EU pricing pressure, US health care reform, and pipeline setbacks, some of the company's recent launches should start contributing significantly to the top line in the forthcoming quarters.

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