Ailing Merck Defies Cure

"I think it was a little more than bad luck," said Lund who owns shares but whose firm doesn't have an investment banking relationship. "There was a miscalculation on the part of management. They did not prepare themselves for a worst-case scenario."

The worst-case scenario will be a big erosion in revenue, says a recent study by the SG Cowen brokerage. Among nine Big Pharma companies, Merck has a frightening 29% of 2003 revenue at risk due to product patents expiring between 2004 and 2008. The biggest shock will come in mid-2006 when Zocor, which has started losing patent protection in some foreign markets, succumbs to generic competition in the U.S. The cholesterol drug produced $5 billion in sales last year, or 22% of corporate revenue.

The Cowen study noted that the average generic risk during 2004-2008 among the Big Pharma companies was 16% of total 2003 sales. Merck also placed well below average among its peers in projected revenue growth and earnings per share growth. Between 2003 and 2008, Cowen projected a compound annual revenue growth of 3% for Merck, which tied for seventh place. The group average was 5%. For the same period, Cowen pegged Merck's EPS growth at 3%, or eighth place, and below the group average of 5%.

And for all you fans of the oft-rumored Merck purchase of Schering-Plough (SGP Quote), please note that Cowen predicts a 1% revenue growth rate and 5% EPS growth rate for that drugmaker.

The logic of the phantom dealmakers goes like this: Merck and Schering-Plough comarket the well-regarded cholesterol drug Vytorin. Because Schering-Plough is trying to dig out from problems far worse than Merck's, and because Merck needs a hit product to offset the generic assault on Zocor, a takeover would benefit shareholders of both companies. As an added attraction, Fred Hassan, the Schering-Plough CEO, could succeed Gilmartin.

But many analysts say such a deal is illogical. "It's hard to keep growth continuing after the first big acquisition," said Rauch of A.G. Edwards. "You find that you need to buy again. I don't think they'll look outside to buy a [big] company."