It still beat Wall Street's profit expectations, but sharply lowered its own forecast for the full year, sending shares down.
Generic competition continues to hammer asthma and allergy pill Singulair, cutting sales 53 percent to $280 million. The drug brought in $5.5 billion a year until its patent expired in August 2012 and cheap copycat versions flooded the market.
The world's third-biggest drugmaker by revenue previously has weathered generic competition to its blockbusters well, usually managing to keep total sales about the same level as before big patent expirations.
"This year, we were not able to do that," CEO Kenneth Frazier said Monday in an interview with The Associated Press.
Revenue in the quarter totaled $11.03 billion, down 4 percent and below analysts' expectations for $11.13 billion.
Besides Singulair, Merck is being hurt by generic versions of a half-dozen other drugs, plus unfavorable currency exchange rates, and its newer medicines aren't picking up all the slack. Merck said it now expects total 2013 sales to be down 5 percent to 6 percent from last year.
Its top seller, Type 2 diabetes pill Januvia, had been climbing steadily toward the $4 billion-a-year mark, but sales slipped 5 percent in the quarter. Merck blamed exchange rates and U.S. wholesalers reducing inventory. It said it will devote more resources to marketing Januvia and Janumet, a combination pill that includes the generic diabetes drug metformin.
"Big, ugly surprise in revenues," concluded Erik Gordon, an analyst and professor at University of Michigan's Ross School of Business. "It's a contrast to their sisters in Big Pharma who have been coming close to hitting their projections."
Net income was $1.12 billion, or 38 cents per share, down from $1.73 billion, or 56 cents per share, a year earlier.
The company, based in Whitehouse Station. N.J., said earnings would have been $2.73 billion, or 92 cents per share, excluding charges of $1.2 billion for merger and integration costs and $967 million for restructuring costs. Analysts surveyed by FactSet were expecting 88 cents per share.
Four weeks ago, the company announced another big restructuring program to reduce costs, including eliminating 8,500 jobs, plus 7,500 not yet cut under its 2011 restructuring, together 20 percent of Merck's workforce.
Frazier stressed the drugmaker will continue to invest in research where it has strong prospects, particularly cancer, hepatitis C, immunology and vaccines. It's in early-phase human testing of a compound called MK-3475, that uses a relatively new strategy of harnessing the immune system to fight tumors, against six cancer types.
"This is one of the most exciting things that has happened in my 22 years" at Merck, Frazier said.
The Food and Drug Administration recently gave that drug and Merck's combination hepatitis C drug, MK-5182/MK-8742, "breakthrough therapy" designations, indicating they'll get accelerated reviews because they're seen as potential big advances.
Sales fell 6 percent to $396 million for Merck's combination cholesterol pill, Vytori . But sales of Gardasil, a vaccine against cancer-causing human papilloma virus, jumped 15 percent to $665 million, and sales of Remicade, a drug for immune disorders such as arthritis, climbed 17 percent to $574 million.
Sales of veterinary medicines and consumer health products such as Claritin allergy pills both declined 2 percent, to $800 million and $443 million, respectively.
"Overall, a weak quarter across many divisions," BernsteinResearch analyst Dr. Timothy Anderson wrote to investors.
The company lowered its 2013 profit forecast to $1.61 to $1.79 per share, from its July forecast of $1.84 to $2.05, partly because of unfavorable exchange rates.
In early trading, Merck shares dropped $1.10, or 2.5 percent, to $45.44.