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Merck's Januvia, animal health products slump; shares off

By Ransdell Pierson

(Reuters) - Merck & Co Inc reported lower sales of its Januvia diabetes treatment, fresh evidence its biggest product is losing ground to newer drugs, and also spooked investors with falling quarterly sales of its animal health products.

The company's shares dropped 2.6 percent, or $1.19, to $45.33 in afternoon trading.

Merck's animal health brands, which typically prop up results, suffered a 2 percent sales decline in third quarter, hurt by the recent decision to suspend marketing of its Zilmax weight-gain feed supplement amid concerns it was causing lameness in cattle.

"The fundamentals of the business remain solid despite what we saw in the quarter," Chief Executive Ken Frazier told analysts on a conference call, referring to the animal health unit.

Global sales of Januvia fell 5 percent in the quarter to $927 million. Combined sales of the pill and a related drug called Janumet fell 1 percent to $1.4 billion, versus 5 percent growth in the prior quarter, and marked a return to declines in the first quarter.

"It looks like Januvia might be plateauing," said Morningstar analyst Damien Conover, adding the trend could continue to put pressure on Merck's profits as it strives to develop new medicines.

ISI Group analyst Mark Schoenebaum said combined U.S. sales of Januvia and Janumet were $91 million short of Wall Street estimates, and may force Merck to back off its earlier prediction that the Januvia franchise will grow by the "mid-single-digit" percentage range this year in the United States.

Januvia sales have grown by leaps and bounds since the drug was approved in 2006 - the first member of a new class of oral diabetes treatment called DPP4 inhibitors.

But three similar drugs have been introduced since then and are taking market share from Januvia, including Bristol-Myers Co's Onglyza, and Tradjenta from privately held Boehringer Ingelheim and Eli Lilly and Co .

Merck said the falling number of Januvia prescriptions in the quarter was a surprise and cause for concern.

"If the volumes continue to decline, definitely it will be a problem for us," Adam Schechter, head of global human health at Merck, said on the conference call.

Merck shares have risen 11 percent this year, only half the gains seen for the ARCA Pharmaceutical Index <.DRG> of large U.S. and European drugmakers, on worries about Januvia and failures or regulatory setbacks for a handful of its most important experimental drugs. Its shares have also been held back by plunging sales of its former top product, Singulair for asthma, which began facing cheaper generics last year.

In the meantime, rivals like Pfizer Inc and Johnson & Johnson have launched a crop of new medicines and have high hopes for others in clinical trials.

Faced with Januvia's stall and setbacks for its drug pipeline, Merck said early this month it will cut annual operating costs by $2.5 billion and eliminate 8,500 jobs, or more than 10 percent of its global workforce.

Like other drugmakers that have slashed costs in the past three years, most notably Pfizer, Merck said it will narrow its focus to products with the best chance of winning regulatory approval and achieving substantial sales. That means it will scrap some drugs already in late-stage trials, while licensing products from other drugmakers.

The company earned $1.12 billion, or 38 cents per share, in the third quarter, compared with $1.73 billion, or 56 cents per share, in the year-earlier period.

Excluding special items, Merck earned 92 cents per share. Analysts, on average, expected 88 cents per share, according to Thomson Reuters I/B/E/S.

Merck said the better-than-expected earnings was largely due to efforts to manage costs across the board. Research and development spending was lower in part because costly late-stage trials of some medicines had been delayed until the fourth quarter.

Company sales fell 4 percent to $11.03 billion, below Wall Street estimates of $11.12 billion. They would have fallen 2 percent if not for the stronger dollar, which lowers the value of sales in overseas markets.

Merck's Gardasil vaccine to prevent cervical cancer was a bright spot in the quarter, with sales rising 15 percent to $665 million, helped by additional sales to government healthcare providers. And sales of Remicade, used to treat rheumatoid arthritis, rose 12 percent to $574 million.

Merck expects full-year earnings of $3.48 to $3.52 per share, excluding special items. Early this month, it forecast $3.45 to $3.55 per share.

(Reporting by Ransdell Pierson in New York; Editing by Jeffrey Benkoe and Bernard Orr)

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