Ailing Merck Defies Cure

Republished from Sept. 16

You know something is strange when an analyst describes a venerable company like Merck(MRK) as a turnaround story -- for 2007.

Despite a top-notch credit rating and strong reputation, Merck's stock is stuck in a rut. It is reeling from the recent failure of several experimental drugs. And it is starting to feel the impact of patent expirations on important existing products.

Clearly, this can't be what Raymond V. Gilmartin, Merck's chairman and CEO, was looking forward to approaching the company-mandated retirement age of 65 in March 2006. But disappointing test results, bad timing, and what some analysts say was a slow response to the changing marketplace have put Merck -- and Gilmartin's successor -- in an uncomfortable position among its peers and investors.

Under the leadership of Gilmartin, who assumed the role of CEO in June 1994, Merck's market performance has been good, but not great. From July 1, 1994, to Aug. 31, 2004, for example, Merck outpaced the S&P 500 but trailed the Amex Pharmaceutical Index of 15 big drug stocks (which includes Merck). A $1,000 investment in Merck would have yielded $3,190, better than the S&P's $2,490 but worse than the drug index's $4,000.

For short-term investors, Merck's returns aren't impressive. From the beginning of the year through Sept. 14, that $1,000 investment in Merck was down to $986, better than the drug index (down to $966) but worse than the S&P 500 (up to $1,015).

Still, it's the next few years that really worry analysts. They're forecasting serious sales doldrums as Merck struggles to make up in new-product revenue what it will lose in sales due to generic competition. Perhaps this wouldn't have been an issue if clinical trials hadn't been cancelled on four products last year, including late-stage tests of drugs to treat diabetes and depression. "It's unusual to have two [late-stage] testing products blow up like that," said Albert Rauch of A.G. Edwards, who has a neutral rating on Merck.