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A Weak Tonic for Merck

Finally some good news for Merck (MRK). On Nov. 3 the drugmaker emerged victorious in the latest case involving its withdrawn painkiller Vioxx. A jury in Atlantic City, N.J., found that Merck had properly warned about the risks of Vioxx in a case involving the 2001 heart attack of U.S. Postal Service employee Frederick Humeston. The win was critical for Merck, which is facing a potential liability stemming from Vioxx that some analysts have pegged as high as $30 billion.

This victory comes after a painful loss in a Texas case in August in which a jury awarded the plaintiff a total of $253 million (see BW Online, 8/22/05, "Merck: More Agony From Its Painkiller"). Merck is appealing that verdict, and the award will be cut significantly based on Texas limits on punitive damages. Merck General Counsel Kenneth C. Frazier said after the Atlantic City verdict that the drugmaker would continue to vigorously defend itself against thousands of Vioxx lawsuits. "We do not intend to allow organized groups of plaintiffs lawyers to use Merck as an open bank," Frazier warned.

LOST PROTECTION. So is this the beginning of an upswing for Merck? Don't bet on it. For one thing, it will have to fight many cases in court in the years ahead. And because Humeston took Vioxx for a relatively short period of time, his case was seen as potentially weak. Merck has maintained that the data show that the heart attack risk from Vioxx emerges only after 18 months of continuous use, although some medical experts dispute that position. And it's unclear how many of the thousands of pending cases involve patients who took the drug for extended periods of time.

Vioxx is hardly the only problem Merck faces. Over the next eight years four multibillion-dollar drugs, including the $4.3 billion cholesterol drug Zocor, lose patent protection (see BW, 9/5/05, "The Pain Is Just Beginning"). That will create a major drag on earnings. And Merck has little to plug the hole.

Most recently it suffered a major drawback when, due to safety concerns, the Food & Drug Administration sidelined a diabetes drug it was hoping to market with Bristol-Myers Squibb (BMY). And while Merck is talking up the potential of Gardasil, its vaccine for the human papillomavirus, which causes cervical cancer, some analysts are warning that it may be a disappointment. Stephen M. Scala at SG Cowen slashed his sales estimates for Gardasil earlier this year. Among the reasons: It's unlikely to be a mandatory vaccination, and patients and insurers may balk at paying a high price for it (see BW Online, 2/23/05, "The New Drugs to Watch in 2005").

HUGE DEPARTURE? So how does Merck Chief Executive Richard T. Clark plan to revive the drugmaker? It's unclear. But at a recent meeting with analysts, Clark did raise the possibility that Merck could diversify into diagnostics or devices. That would be a huge departure -- and fraught with plenty of risks as rival Johnson & Johnson (JNJ) has found recently with its troubled Guidant (GDT) acquisition.

In the end there's no easy remedy. "If the Vioxx liability went away today," says Scala, "You'd be left with a fundamentally weak company."


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