Merck Pops On Good Profits, Tax Deal?

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Even though Merck doesn’t plan an international marriage to cut its tax bill, its shares are rallying today on solid results in the latest quarter.

Merck (MRK) stock is up 2% today after Merck reported second-quarter earnings per share of 85 cents, better than the 81 cents analysts expected, according to Thomson I/B/E/S data.

Here are insights on the conference call that ensued, from ISI’s biotech and pharmaceutical industry analyst Mark Schoenbaum, paraphrased:

Merck wants “bolt-ons” acquisitions (like Idenix Pharmaceuticals (IDIX)) versus big purchases. Moreover, it is not interested in a deal primarily or solely for tax inversion purposes …  [That's not ruling out the possibility of buying a foreign company to avoid U.S. taxes, but the language seems contrary to the foreign-merger possibilities for other healthcare companies, including Valeant Pharmaceuticals (VRX), Actavis (ACT), Pfizer (PFE), AbbVie (ABBV), Medtronic (MDT) and even Walgreen (WAG).] Merck sees a “high likelihood” of success for the four-week Hepatitis C regimen from C-SWIFT when presented at a medical conference this fall. (The combo treatment includes Gilead’s Sovaldi, already on the market, and a Merck regimen.) The company sees “lots of opportunities” to possibly accelerate Food & Drug Administration filings for an experimental immuno-oncology drug for lung cancer patients. It’s excited about the expected Aug. 14 FDA decision on insomnia drug Suvorexant. (Wall Street is bearish on commercial prospects.) Merck expects U.S. volume growth for diabetes drug Januvia (which is roughly 25% of earnings) in the second half of 2014.

For healthcare investing ideas and insight on so-called tax inversions, see the Barrons.com Q&A with Andy Acker, manager of the Janus Global Life Sciences Fund (JAGLX): “Undervalued Biotech Stocks Help Fund Beat the Index,” July 29. (Subscription required) One insight from Acker:

“U.S. companies are at a competitive disadvantage from our country’s high statutory tax rates compared to other countries and the piles of cash stranded overseas. Re-domiciling is one way to deal with the situation. Some members of Congress have publicly talked about closing the loophole. If the policy is changed, it would be a 2015 or 2016 event, which gives companies a window of opportunity.”