* Q3 EPS $0.94 vs. $0.91 forecast
* Q3 sales $12.02 bln vs. $11.61 bln forecast
* Victrelis sales $31 mln
* Cuts research budget to between $7.8 bln and $8 bln
* Merck shares rise 2.3 percent (Adds analyst, company comments; updates share price)
By Ransdell Pierson
Oct 28 (Reuters) - Merck & Co's (MRK.N)sales beat forecasts by a bigger margin than any of its U.S. rivals in the third quarter, fueled by sales of its diabetes drugs and Gardasil cervical cancer vaccine, lifting its shares more than 2 percent.
Global revenue rose 8 percent to $12.02 billion, beating Wall Street expectations by more than $400 million and eclipsing sales beats of $20 million to $200 million seen in the quarter by other drugmakers.
Company results were also greatly helped as the U.S. drugmaker cut its research spending by $368 million in the quarter, to $1.95 billion, citing efficiency savings and lower clinical trial grant expenses. It now expects to spend $7.8 billion to $8 billion a year on research -- down from its prediction in July of between $8 billion to $8.3 billion.
Morningstar analyst Damien Conover said Merck (MRK.N) may have pulled back on research spending as it aims to deliver promised higher profit margins by 2013.
"If they continue to moderate research and development spending they may have a better shot at hitting that goal," Conover said. "The lower spending here signals more-moderate contributions to R&D going forward."
Conover noted that quarterly revenue would have only risen 3 percent if not for the weak dollar, which boosts the value of sales in overseas markets.
One disappointment was the relatively paltry sales of the company's new Victrelis drug for hepatitis C, compared with gangbuster revenue reported on Thursday for Vertex Pharmaceuticals Inc's (VRTX.O) rival Incivek.
Victrelis sales, of $31 million, represents just a fraction of the $420 million in sales that arch-rival Incivek collected in the period -- which analysts said made it one of the most impressive new drug launches in history.
Both drugs received great fanfare when they were approved by U.S. regulators in May because they promise a higher cure rate than older treatments for the hepatitis C virus, which infects the liver and can lead eventually to cirrhosis and liver failure.
Victrelis is capturing about 25 percent of U.S. prescriptions for the new class of hepatitis agents, even though its sales might not yet reflect it, Merck said.
Merck earned $1.69 billion, or 55 cents per share, in the third quarter. That compared with $342 million, or 11 cents per share, in the year-ago period, when the company took several big charges.
Excluding special items, Merck earned 94 cents per share. Analysts on average expected 91 cents per share, according to Thomson Reuters I/B/E/S.
Barclays Capital analyst Tony Butler said sales from Merck's animal health business rose 20 percent to $826 million, thanks to new products, and contributed to the earnings beat.
"Animal health has been outstanding and they've got more products in the hopper," Butler said.
Gardasil sales rose 41 percent to $445 million, after becoming available in more overseas markets. The vacccine -- which prevents infection with the human papillomavirus that cause cervical, oral, anal and penile cancer -- was helped by growing use by boys in the United States.
U.S. vaccine advisers earlier this week recommended that boys should be routinely vaccinated against the sexually transmitted virus.
Sales of Januvia grew 41 percent to $1.2 billion, helped by introductions of combination products that pair the diabetes drug with other medicines.
Singulair, an asthma drug that is Merck's biggest product, rose 10 percent to $1.34 billion. But sales of the pill are expected to plunge next year, when it faces cheaper generics in the United States.
Merck predicted full-year 2011 earnings of $3.72 to $3.76 per share, raising the low end of its prior forecast by 4 cents.
Having spent $8.1 billion on research last year, Merck is using a paring knife rather than the cleavers that some rival drugmakers are taking to their research budgets in order to bolster earnings. Pfizer Inc (PFE.N) earlier this year said it would cut as much as 25 percent of its $8 billion to $8.5 billion research budget to deliver on a 2012 profit forecast.
In addition to trimming research spending, Merck continues to eliminate jobs and cut other costs as it continues to integrate Schering Plough -- the rival U.S. drugmaker it bought in 2009 for $41 billion.
Merck in July said it plans to cut another 12,000 to 13,000 jobs by late 2015 to generate additional annual cost savings of up to $1.5 billion that can be folded back into research and deal-making. It cut a net 6,000 positions last year.
Shares of Merck closed up 80 cents at $35.11 on the New York Stock Exchange. (Reporting by Ransdell Pierson; Editing by Derek Caney, Phil Berlowitz and Bernard Orr)