The world's two largest drugmakers, Pfizer Inc. and Merck&Co., posted big revenue jumps but lower net income for the first quarter, as they enjoyed new revenue from big rivals acquired last year but absorbed billions in severance pay and other costs.
Still, their relatively upbeat profit forecasts for this year and beyond are a sign the acquisitions are starting to pay off. Both companies beat Wall Street profit expectations widely and edged out revenue expectations, partly due to favorable currency exchange rates.
The results sent their shares higher on a day when the broader markets fell significantly.
"I'd say there's some relief involved" after their profit forecasts, said Miller Tabak analyst Les Funtleyder.
He said investors "are rotating back into pharma," which is generally seen as a defensive, low-volatility sector, adding, "Merck and Pfizer get an extra boost" to their shares for beating their first-quarter forecasts and giving reassuring ones for the future.
That comes despite significant revenue losses due to the U.S. health care overhaul and costs exceeding $2 billion each for Pfizer to integrate Wyeth, bought in October for $68 billion, and for Merck to integrate Schering-Plough Corp., bought in November for $41 billion.
Merck shares rose 63 cents, or 1.8 percent, to $35.90, while Pfizer shares rose 39 cents, or 2.3 percent, to $17.30, in Tuesday afternoon trading.
Pfizer said it expects health law changes including higher rebates for drugs bought through the Medicaid program to reduce revenue by about $300 million this year, $900 million in 2011 and $800 million in 2012. Merck expects the changes to cost $170 million this year and roughly $325 million next year.
Starting in 2014, millions more Americans are expected to be insured because of the overhaul, boosting prescription drug sales.
Costs are bigger after 2010 because additional requirements begin in January, including one that drugmakers pick up part of the cost of the Medicare "donut hole" prescription coverage gap.
Executives at Pfizer and Merck said they believe they can absorb those costs, and the related reductions in revenue, without hurting the bottom line.
Other major drugmakers generally had similar expectations, or reduced their earnings forecasts by a small amount. Pfizer, based in New York, and Merck, based in Whitehouse Station, N.J., were the last big companies to report.
"I'd say it was a good quarter" for the pharmaceutical industry, Funtleyder said. "Most of the big pharmas seem to be on their way to achieving whatever corporate agenda they set out to achieve," from diversifying with acquisitions to boosting sales in emerging markets.
The drug market also seems to be returning to health after being squeezed by the recession. Pharmacy chain and prescription benefit manager CVS Caremark Corp. said Tuesday that pharmacy revenue grew 3.7 percent at stores open at least a year.
Pfizer, the world's biggest drugmaker, bought Wyeth for its expertise in vaccines and biologic drugs and for its consumer and animal health businesses.
"Where we thought the value would be is where the value is," said Chief Financial Officer Frank D'Amelio said in an interview.
For example, Wyeth blockbusters such as antidepressant Effexor and children's vaccine Prevnar helped boost Pfizer's revenue 54 percent to $16.75 million, while an improved, just-launched Prevnar version could also get approval for preventing pneumococcal infections such as meningitis in adults.
On Tuesday, the maker of cholesterol fighter Lipitor and impotence pill Viagra said charges related to the Wyeth purchase pulled down earnings 26 percent to $2.03 billion, or 25 cents per share. However, adjusted income totaled $4.88 billion, or 60 cents per share, up 33 percent and 7 cents better than analysts expected.
Pfizer backed its 2010 forecast for adjusted earnings per share of $2.10 to $2.20 per share, and its 2012 adjusted earnings forecast of $2.25 to $2.35. The latter numbers are crucial because that's when Lipitor, the world's best-selling drug at nearly $12 billion a year, gets competition from cheaper generic competition.
Merck, the No. 2 drugmaker by sales, also bought Schering-Plough to diversify.
The maker of asthma and allergy pill Singulair and cholesterol drugs Vytorin and Zetia reported net income of $298.8 million, or 9 cents per share, down 79 percent. Excluding charges totaling $2.31 billion, Merck would have earned 83 cents a share, or 8 cents more than analysts expected. Revenue more than doubled to $11.42 billion.
Merck said it expects earnings per share this year of $3.27 to $3.41 per share, excluding roughly $2 per share in one-time items. Merck said it remains on track to reach its goal of $3.85 billion in annual savings in 2012 from combining the companies.