Merck Slips Amid Warning About Zocor

Updated from 3:50 p.m. EDT

Shares of Merck(MRK Quote) shed more than 3% Monday after the pharmaceutical giant posted a rise in second-quarter profit but cut sales guidance for its Zocor cholesterol drug.

The company reported net income of $1.87 billion, or 83 cents a share, for the three months ended June 30, missing analysts' estimates by a penny, according to Thomson First Call. Net income was up 7% from $1.75 billion for the same period last year, while EPS was up 8% from 77 cents. Revenue rose 4% to $13.28 billion from $12.81 billion for the Whitehouse Station, N.J., company.

Merck lowered its year-end revenue guidance slightly for two big products -- Zocor, its top-selling product, and Vioxx, its arthritis and pain medication. It raised its year-end revenue guidance for other major products -- Cozaar and Hyzaar for high blood pressure, and Fosamax for osteoporosis.

The company affirmed its guidance of full-year 2003 earnings in the range of $3.40 to $3.47 a share. For the third quarter, the company said the EPS growth rate would be "generally consistent" with the growth in the first half, which was 7%. Thomas First Call's consensus is $3.41 for the full year.

"Overall, we think the quarter was OK, not great," said Jami Rubin, a drug industry analyst for Morgan Stanley, in a research note to clients filed after Merck conducted a morning conference call for analysts. "Importantly, there were no major changes to management's guidance of $3.40 to $3.47."

Rubin, who doesn't own Merck shares, rates the stock as overweight, pointing out that Merck trades at a 15% discount to its peers. Morgan Stanley has had an investment banking relationship with Merck in the last 12 months and expects to continue this relationship within the next three months.

Merck's sales were adversely affected by $405 million in wholesaler buyouts -- more commonly called "channel stuffing" -- in which wholesalers load up on a product in anticipation of price increases. Merck referred to the practice as wholesalers' placing "some noncancelable orders at prices that remain until Merck ships the product." The company said estimated wholesaler inventory levels remain "within a range customary for Merck products, in the aggregate."