S&P Takes Ax to Merck

Updated from 1:45 p.m. EST

The last vestige of Merck'sMRK once-pristine credit was dispatched with Tuesday when Standard & Poor's cut its long-term debt rating by three notches to double-A-minus from triple-A.

The reduction, which follows a two-notch lowering at Moody's and a similar ratings cut by Fitch, follows the drugmaker's Sept. 30 withdrawal of the pain medication Vioxx from public markets. Before the actions, Merck had been one of only seven nonfinancial U.S. companies to wear the triple-A mantel.

The move affects Merck's corporate credit and senior unsecured debt, on which the outlook remains negative, suggesting the ratings could be cut further. Merck's short-term A1-plus rating was affirmed, as was its commercial paper.

S&P acted about three months faster than it had predicted just a few days ago. "The rating action reflects the continued deterioration expected of Merck's business profile in the intermediate term and the challenges the company faces to revitalize its product pipeline" following the withdrawal from the market on Sept. 30 of the arthritis drug Vioxx, S&P said.

"The lower rating incorporates the uncertain magnitude and timing of possible Vioxx-related litigation after the drug's withdrawal," S&P said. The drug was withdrawn because tests showed that patients using Vioxx for more than 18 months had a higher risk of heart attacks and stroke than did patients taking a placebo.

"Such litigation uncertainty is not present in the ratings of other 'AA' pharmaceutical companies," said S&P credit analyst Arthur Wong.

S&P added that Merck "continues to maintain a very strong business profile," despite the loss of Vioxx and the impending U.S. patent expiration of the cholesterol drug Zocor by mid-2006. "At the same time, the company maintains a very conservative financial policy, with cash and investments exceeding debt, and it continues to generate funds well in excess of ongoing needs," S&P said.

Fitch Ratings last Thursday downgraded Merck's senior unsecured and bank loan ratings to 'AA' from 'AAA.' Fitch said the downgrade affects approximately $6.59 billion of short- and long-term debt. At the same time, Fitch affirmed the 'F1+' commercial paper rating.

Fitch placed a "negative outlook" on Merck, a move that "reflects potential risks to cash flow generation from significant product liability litigation."

The outlook also reflects lost revenue due to the Vioxx action, the effect of patent expirations on key products in the next few years "and possible penalties or fines from current government investigations."

Moody's cut Merck's rating last Tuesday. Moody's dropped its rating from Aaa to Aa2, and it held open the prospect of an additional downgrade depending on the size of Merck's Vioxx liability.

Merck's stock rose 39 cents Tuesday to close at $27.48.