Merck reported improved year-over-year (YoY) sales growth at an 8% pace in the third quarter, with a significant top-line contribution from currency (5 percentage points). The double-digit growth of the key Singulair, Januvia, JanuMet, Gardasil and Isentress products were able to offset the impact of ongoing generic erosion and the loss of certain overseas rights for Remicade and Simponi in the quarter. As a result of its arbitration settlement with J&J, Merck lost several emerging market territories for Remicade and Simponi, which resulted in a $100m (-15%) decline in Remicade sales on a YoY basis. On the positive side, the company's vaccine franchise showed a further recovery in the third quarter with Gardasil, RotaTeq and Pneumovax recording exceptional YoY gains. Gardasil trends were supported by its expanded indication for males, as well as its launch in Japan, which contributed to 41% growth and $445m in quarterly sales. Zostavax vaccine sales also jumped YoY, but management cautioned that back orders still need to be worked through to ensure adequate supply for the brand going forward. Surprisingly, sales of the company's new Victrelis product, contributed only $31m in third quarter sales, which was up from $21m in the second quarter, but well below the $420m in quarterly sales reported by its main competitor, Vertex' Incivek. Merck expects Victrelis trends to continue to improve, due to a longer therapeutic cycle than Incivek, and ongoing launches throughout Europe.
Merck's quarterly earnings were also supported by good cost control, particularly on the R&D line, due to efficiency gains and site closures in 2010. This was enough to offset a modest uptick in the SG&A-to-sales ratio, with spending behind new product launches and investments in emerging markets, to show a 220 basis point (bp) operating margin improvement. Below the operating line, Merck experienced a 150 bp increase in its effective tax rate, which was due to changes in the company's geographic and product mix, as well as a favorable tax settlement recorded in the year ago period.
Overall, Merck delivered double-digit earnings growth on an adjusted (non-GAAP) basis in the third quarter at 94-cents a share, which were 3-cents above consensus forecasts. This EPS figure excludes $1.2b in special acquisition-related, purchase accounting and restructuring charges, as well as a divestment gain (consumer health joint venture) in the quarter. Following these results Merck raised the low-end of its prior earnings guidance range to $3.72 to $3.76 per share for the full-year 2011. Management confirmed its latest cost reduction goal of $1.3b to $1.5b a year by the end of 2015, which involves a 12% to 13% reduction in its workforce. The company also highlighted its commitment to returning cash to shareholders with a $1.2b dividend payout and $1.0b in share buybacks during the third quarter, while moving its intended R&D spending to a slightly lower $7.8b to $8.1b range for the full-year.
Despite recent pipeline setbacks and lower R&D spending this quarter, Merck continues to rely on its innovative-driven R&D model to provide the new products to support the growth of its pharma business. During the third quarter, the company showed progress with the FDA approval of its Juvisync (Januvia and simvastatin) combination diabetes treatment, and European Commission approval of its Zoely (NOMAC-E2) oral contraceptive. In addition, Merck's filing of ridaforolimus for the treatment of bone sarcomas was accepted in both the US and Europe. Merck also responded to prior FDA concerns surrounding its XR formulation of JanuMet in the quarter.