(Rewrites with background on tax, details on Zostavax and Zepatier)
By Michael Erman and Manas Mishra
Feb 2 (Reuters) - Lower taxes helped U.S. drugmaker Merck & Co beat analysts' estimate for fourth-quarter earnings on Friday, offsetting weaker-than-expected sales as some of its products face increasing competition.
The drugmaker's shares fell 0.8 percent to $59.35 in early trading.
Sales for its blockbuster Keytruda cancer immunotherapy were better than expected, but Merck was hurt by competition for its shingles vaccine Zostavax and hepatitis C drug Zepatier.
The company also said 2018 earnings would likely be better than analysts had previously forecast as its tax rate will stay low due to the U.S. tax overhaul passed in December.
Merck now expects its effective tax rate in 2018 to be 19 percent to 20 percent, dropping by up to another percentage point after that.
Chief Financial Officer Robert Davis said that the new law - which cut the corporate rate to 21 percent from 35 percent - should lower its taxes by a couple of percentage points.
The company's effective tax rate was 19.1 percent last year, but that was helped by one-time foreign tax benefits. Its 2016 effective tax rate was around 22 percent.
Merck has about $17 billion of cash available for repatriation, according to Davis.
The company said it plans to invest $12 billion in capital projects over the next five years, two-thirds of which will be in the United States, due in part to the new tax law.
Merck's sales rose 3.1 percent to $10.43 billion in the fourth quarter, but were slightly below the average analyst estimate of $10.49 billion.
Sales of Keytruda, which works by blocking a mechanism tumors use to evade detection from the immune system, nearly tripled to $1.30 billion in the fourth quarter.
The strong sales numbers for Keytruda were driven by uptake in first-line non-small cell lung cancer, Guggenheim Securities analyst Tony Butler said in a client note.
Lung cancer is by far the most lucrative oncology market, and Merck last month assuaged concerns about Keytruda testing delays by announcing positive early results from a lung cancer trial.
Merck's net loss widened to $872 million, or 32 cents per share, from $594 million, or 22 cents per share, a year earlier. It took a charge of $2.6 billion related to the new U.S. tax law in the quarter.
Excluding items, Merck earned 98 cents per share, beating analysts' average estimate of 94 cents, according to Thomson Reuters I/B/E/S.
Merck forecast 2018 adjusted profit in the range of $4.08-$4.23 per share. Analysts on average were expecting $4.11 per share. (Reporting by Michael Erman in New York and Manas Mishra in Bengaluru; Editing by Sriraj Kalluvila and Bill Rigby)