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|  | DECEMBER 9, 2004
By Amy Tsao Merck Gets a Breather -- for Now The beleaguered drug giant's lowered forecast isn't as bad as Wall Street expected. But investors still await the long-term prognosis Merck's (MRK ) earnings update on the morning of Dec. 8 was a little less robust than analysts had been expecting. Still, the embattled pharmaceutical company promised some revenue growth for 2005. This, and investors' relief that profit margins weren't worse, lifted the shares 2.7%, finishing at $28.65. "I was bracing for some revelation about future revenues or about possibly [the arthritis drug] Vioxx," says Tom D'Amore, an analyst at Morningstar. D'Amore and other analysts were relieved that the Whitehouse Station (N.J.) company said earnings for next year would be in the range of $2.42 to $2.52 per share -- about 5 to 10 cents below what the Street had been predicting. Costs related to the high-profile withdrawal of painkiller Vioxx were the main reason for the lowered outlook. But Merck did soothe jitters about the drug when it forecast revenue growth of 5% to 7% for 2005, citing modest sales increases for hypertension drugs Cozaar and Hyzaar, asthma drug Singulair, and osteoporosis treatment Fosamax. BUMPY RIDE AHEAD. "Highlights of other parts of the business show [Merck] to be doing alright," says Sena Lund, analyst at Cathay Financial in New York City. (The analyst owns Merck shares, but the firm doesn't perform any investment banking for the company.) Even so, there's no mistaking that Merck is in for a tough 2005. Key businesses continue to struggle, while time lag before new potential blockbuster drugs hit the market is wide. Sales of cholesterol drug Zocor, which accounts for about one-quarter of Merck's $19 billion in annual revenues, are expected to fall some 14% to 16% from this year, when it had sales of about $5 billion. This disappointed some analysts. "I was looking for a single-digit decline," says D'Amore. Why the precipitous drop? Major rivals Astra-Zeneca (AZN ), maker of Crestor, and Pfizer (PFE ), creator of Lipitor, enjoy more patent life on their products than Merck does with Zocor. Those companies will likely spend heavily to capture market share in 2005. Zocor also faces generic competition starting in the middle of next year. CLOSE SCRUTINY. The fallout from Vioxx litigation will continue to be the elephant in the room as far as Merck investors are concerned. Sanford Bernstein analyst Richard Evans recently calculated that litigation costs could total as much as $38 billion. "It's way too early to accurately assess what the cost will be to the company," counters D'Amore. He figures about $15 billion for future litigation, but he admits that number could change depending on what develops in the next several months. A key event to watch will be a Food & Drug Administration meeting in mid-February assessing the safety of Vioxx and other drugs like it. As challenging as 2005 will be, it's likely to be followed by several more difficult years for Merck. Lund, who rates the stock at neutral, says the drug giant will be focused on making sure 2006 "looks somewhat better" than 2005. That'll be no small feat, considering that 2006 will be Merck's first year without Zocor. Some relief may come in the form of new drug approvals, particularly an O.K. for its follow-up to Vioxx, called Arcoxia. But it's certain that regulators will scrutinize that drug closely. Merck's latest earnings projection won't be enough to drive a sustained rise in the battered stock. Standard & Poor's analyst Herman Saftlas suspects "that some investors were relieved that the EPS projections were not as bad as some had feared." It's also likely that some were covering short positions ahead of Merck's Dec. 14 R&D meeting with investors and analysts, says Saftlas, which probably contributed to some of the rise in the shares. (Saftlas doesn't own shares. Standard & Poor's, which like BusinessWeek Online is owned by The McGraw-Hill Companies, doesn't perform investment banking.) But investors will remain skittish until they have a clearer idea of how big a hit Merck is going to take from the Vioxx debacle.  Tsao is a reporter for BusinessWeek Online in New York Edited by Thane Peterson
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