Vioxx expected to drag on Merck 2005 and play key role in 2006 performance

Vioxx is expected to drag down Merck & Co.'s 2005 earnings when they are reported Tuesday. But what's really frustrating analysts is their inability to assess the drug's potential liability and the toll that litigation preparations are taking on the company.
Divining the impact of the approximately 9,200 suits filed over the now withdrawn blockbuster Vioxx may become easier in the next six months as a verdict pattern emerges from the 11 trials Merck faces in that period. The company has won one case, lost another and the third ended in a mistrial.
Advertisement

At least one analyst expects Merck will take a charge this year to increase its legal reserves for the first time since 2004, to lift the amount beyond $675 million. A charge for potential liability is also a possibility, said Jason Napodano, an analyst at Zacks Independent Research.
Since Merck will be trying some of the cases simultaneously, some analysts worry the crush of litigation may drain executives' energy and concentration at a time when the company faces numerous challenges. They are telling clients to avoid Merck stock until the Vioxx outlook comes into focus.
Scott Henry, an analyst at Oppenheimer & Co, said many drug companies are trading at low prices so there is no reason to buy Merck when the litigation risk is so cloudy. “Why bother with Merck?” asks Henry. “How many venues can they (Merck) really concentrate on?”
Ted Mayer, lead outside counsel for Merck, said the Vioxx litigation was expensive and time-consuming. However, he noted the company knew it would be facing a crush of trials and is very well-prepared. He said there are several scientists well-versed in the Vioxx situation to give testimony. Meanwhile, there are thousands more back at the labs working on new drugs to sell.
“The bench is deep,” Mayer said.
On Tuesday, Merck is slated to report 2005 results that will be hurt by the lack of Vioxx sales. Merck took the pain reliever off the market in Sept. 2004 after a study showed it doubled patients' risk of heart attack and strokes after 18 months of use. But the company still banked nine months of revenue. That was gone in 2005. Some analysts expect sales of cholesterol-lowering drug Zocor also fell last year, and will shrivel later this year because the drug loses patent protection in June.
Prudential analyst Tim Anderson expects 2005 earnings will be essentially flat at $2.36 a share, including expenses for stock options.
Last year was a tumultuous one for Merck. The company replaced its chief executive officer with former Merck manufacturing executive Richard T. Clark. During the fourth quarter, Clark announced the company was eliminating 7,000 jobs, closing or selling 31 manufacturing plants and restructuring the company in an attempt to save $4.5 billion to $5 billion by 2010.
Most analysts believe Merck's vaccine to prevent cervical cancer will be another blockbuster but are divided about other products' prospects.
With all Merck must accomplish to turn itself around, Napodano views the Vioxx litigation as a significant distraction. “If Dick Clark is spending 20 percent of his time on Vioxx, that is 20 percent too much,” said Napodano.
The first of the 11 new cases began last week in Texas, and a retrial of the first federal case is slated to begin in New Orleans next week. Two cases are slated to be jointly tried in New Jersey in late February.
At least Merck has one less case to worry about: On Monday, Superior Court of New Jersey Judge Carol Higbee dismissed the case of a man who blamed Vioxx for his gastrointestinal problems. According to her motion, Higbee dismissed the case because the plaintiff testified that he would have continued to take Vioxx if he was warned about Vioxx's potential side effects. Merck believes it is the first case dismissed since the drug was pulled.