WASHINGTON, April 24 (UPI) -- Merck posted an 11-percent increase in first-quarter earnings, but that may not be enough to assuage analysts concerned about the impact of thousands of pending lawsuits over Vioxx.
David Moskowitz, an analyst for Friedman, Billings, Ramsey and Co., reiterated his "underperform" rating for Merck and advised investors to avoid the company.
"While the company uses cost cutting to squeeze earnings and cash flow out of an anemic top line while fighting hoards of angry former Vioxx users, we recommend that investors sit this one out," Moskowitz wrote in a recent research report.
"While new CEO Richard Clark has come out of the gate strong, Merck has legacy issues that continue to plague the company, in our view," Moskowitz stated. "Beyond the key products set to erode to generic competition and an obvious lull in the pipeline, the Vioxx litigation and details of the company's actions related to this issue remain a major public relations nightmare, in our view, that is likely to remain front and center for some time, given Merck's strategy to litigate each case one by one."
Merck's patent on Proscar expires June 16 and its patent on Zocor lapses June 23. The drugs racked up sales of approximately $3.5 billion in 2005.
"We believe that the next several quarters could be challenging for the company, as these two products represent 16 percent of revenues, and international sales for both Proscar and Zocor will also face generic competition," Moskowitz stated.
Merck said last week its 2006 first-quarter sales increased 1 percent compared to the same period last year to $5.41 billion. The firm's net income for the quarter rose to $1.52 billion, or an 11-percent increase from the year-ago quarter.
The company raised its EPS guidance for 2006 from $2.28-$2.36 to $2.32-$2.40.
"Our first-quarter results were driven by the performance of Zocor, Singulair and our vaccines, plus the strong performance of our partnerships and alliances," said Richard Clark, Merck's president and chief executive officer. "The strong financial results, along with our late-stage pipeline events, including the approval of Rotateq, the accepted filing of Januvia, and the priority review for Gardasil, demonstrate Merck's solid momentum as we move forward in 2006."
Merck, which cut 1,800 jobs last year, said it planned to eliminate another 7,000 positions by 2008. The company also said it faces more than 11,500 lawsuits over Vioxx.
Prudential analyst Tim Anderson thought the Merck lawsuits were "manageable," but he too remained concerned about their impact.
"The last two verdicts are concerning to us (one occurred in Merck's backyard of New Jersey, and this new case (Starr County, Tx.) seemed especially weak)," Anderson wrote in a research report. "More lawsuits will likely be forthcoming on the back of these verdicts."
The Texas case, in which the jury awarded $31 million in damages against Merck, should have been "a slam dunk" for the company, given that the plaintiff, a 71-year-old male, had only used Vioxx for seven days but had pre-existing conditions of severe heart disease requiring bypasses and angioplasty, high blood pressure, obesity, tobacco use and a family history of heart disease, Anderson wrote.
Anderson gave Merck a "neutral" rating and a target price of $34. This represents a multiple of 14x his 2006 EPS estimate, which is lower than the current multiple of 17x on large pharma.
"Our below the group average multiple reflects the uncertainties that lay ahead for Merck such as Vioxx legal liability," he wrote.
Bank of America analyst Chris Schott said he thinks Merck will have both positives and negatives in the upcoming months and expects the company's bottom line to be doing well by 2010.
"Despite revenue loss due to numerous patent expirations, we expect Merck's sales growth will rebound by 2010 due to the launch of its new vaccines and DPP-IV inhibitor (Januvia)," Schott wrote in a recent research report.
Schott expects Merck's cervical cancer vaccine Gardasil and its shingles vaccine Zostavax to win approval from the Food and Drug Administration later this year.
However, the Vioxx lawsuits will continue to cast a shadow over the company. "We do expect Vioxx-related headlines will continue to weigh on the Merck story throughout 2006 and beyond," Schott wrote.
He estimated Merck's Vioxx liability to be $20 billion, saying he expects the company could ultimately face up to 100,000 suits over the drug.
"We remained concerned on Merck's ability to defend itself against chronic Vioxx users and expect volatility in Merck shares around jury verdicts," Schott wrote.
