NEW YORK - The stunning news that Merck & Co. is withdrawing its pain reliever Vioxx from the market because of health risks is the latest in a series of blows to what only a few years ago was the world's largest drugmaker and the envy of the industry for its research and development prowess.
"This is nothing short of a disaster," said David Moskowitz, an analyst with Friedman, Billings, Ramsey.
Last year, Merck canceled testing of four drugs, including one that was expected to be its first entrant in the lucrative antidepressant market, after spending millions of dollars developing them.
Its costly and distracting entry into the prescription benefit management business ended in August 2003 when it chose to spin off to shareholders its Medco Health Systems subsidiary after a planned public offering of the unit was abandoned.
Merck announced in January a layoff of 4,400 workers - 7 percent of its global work force - as part of a drive to make the 113-year-old company more efficient ahead of the loss of patent protection on its top selling product, the cholesterol drug Zocor. Its sales are likely to plunge when generic competition begins in 2006.
The upshot: three years of declining earnings. And now the company faces not only the prospect of costly patient lawsuits, but the risk it might become a takeover target - assuming another drugmaker is willing to accept the likely years of litigation risk from the Vioxx fiasco, analysts said.
While the drug industry is facing patent expirations, lawsuits and research setbacks, analysts say Merck made its situation worse by shunning outside collaborations until recently. Last year, the company entered into 47 alliances or joint ventures with other drugmakers, up from 10 in 1999.
"I like the fact they have been more aggressive in deals, and I think that will help over time," said Bert Hazlett, an analyst at SunTrust Robinson Humphrey. Still, he expects Merck's earnings to be flat through 2007.
Merck voluntarily decided to stop offering its second biggest selling drug Thursday after a clinical trial showed Vioxx caused increased risk for heart attacks and strokes.
Merck shares plunged $12.07, or 26.8 percent, to close at $33 on the New York Stock Exchange, an eight-year low. Thursday's decline wiped away $28-billion in shareholder value and left the shares down almost two-thirds from their peak at the end of 2000.
Meanwhile, Standard & Poor's lowered its outlook on Merck to negative from stable, although it affirmed the company's triple-A corporate credit and senior unsecured debt rating.
Merck CEO Raymond Gilmartin acknowledged the loss of Vioxx sales would hurt in the near term, but remained upbeat about the company's prospects - a view not shared by Wall Street analysts.
"I think we are on the verge of a whole new cycle of drug approvals," Gilmartin said. "Every company goes through lulls. It is important in this industry to take a long-term view."
Even so, many analysts think Merck's low stock price makes it vulnerable as a takeover target or it could be pressured to merge. Norvartis AG and Johnson & Johnson were mentioned as possible suitors.
Schering-Plough Corp. also is viewed as a potential merger partner since the two companies have a joint venture that launched two cholesterol treatments.
This year, the partnership introduced Vytorian, a combination of two drugs, that has been selling well.
Analysts aren't wild about Schering-Plough's pipeline, but note the deal could save billions of dollars through streamlining operations.
Gilmartin remains adamantly opposed to mergers or takeovers. "We don't see how a merger adds to the pipeline," he said.
In the near term, Merck faces an uphill battle. The company will lose more than $7.5-billion, or 33 percent of its sales, in the next two years because of the Vioxx withdrawal and the loss of patent protection on Zocor.
Vioxx sales totaled $2.5-billion worldwide last year, while Zocor sales were $5-billion.
The U.S. Food and Drug Administration had been expected to rule next month on whether to approve Arcoxia, Merck's successor to Vioxx, which had been touted as a potential blockbuster. But the FDA postponed reviewing the drug once because it required additional safety data, and analysts expect the agency to delay the decision because of the new information on Vioxx. FDA officials didn't return a call for comment.
Still, analysts believe Arcoxia will always be tainted by the Vioxx withdrawal because it belongs to the same class of drugs, know as COX-2 inhibitors. Arcoxia was expected to be launched this year or in early 2005.
I think in the minds of physicians and managed-care professionals there are questions about the COX-2 inhibitors," Moskowitz said. "I think Vioxx will hurt Arcoxia."
Peter Kim, president of Merck Research Labs, cautioned against drawing conclusions about drugs in the same class, and said the company continues to work with the FDA on Arcoxia's approval.
Gilmartin said within the next couple of years, Merck will file applications for three new vaccines, a medicine for sleep disorders and a diabetes drug.
It also will file an application for a diabetes drug it is developing with Bristol-Myers Squibb Co. "Arcoxia is not our only drug," he said.
The company reported 2003 profits of $6.83-billion, or $3.03 a share, down from $7.15-billion, or $3.14 a share, in 2002. Revenue rose to $22.49-billion from $21.45-billion a year earlier.
