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Merck Won't Yield on Yield

Merck still gets high marks from credit-rating firms. At Moody's Investors Service, for example, Merck ranks No. 4 among 21 drug companies. Moody's looks at many factors to develop its credit ratings, and Merck's free-cash-to-debt ratio is still in the high-grade range, says the agency's Michael Levesque. The operating-cash-to-debt ratio, which excludes dividends, still qualifies for a top rating, he says.

Levesque says Merck's "Aa3" rating should hold this year and next as long as the company can generate $1.5 billion in free cash flow annually and keep the Vioxx liabilities under $10 billion. The key to the near-term rating is the Vioxx litigation, Levesque says.

Dividend Dilemmas

Another type of lawsuit is weighing on the dividend strategy at Bristol-Myers Squibb (BMY), which has the highest yield among its peers and a weaker credit rating than Merck. Like Merck, it suffers from too many big-revenue drugs losing, or about to lose, patent protection, and few promising replacements on the horizon.

Bristol-Myers is awaiting a trial challenging its U.S. patent for its biggest drug, the anticoagulant Plavix. A court date has been set for April 2006. The company and its partner Sanofi-Aventis (SNY) are fighting two generic drugmakers that are trying to invalidate a patent that runs into 2011.

"An adverse outcome would cause us to re-evaluate operational and financial needs, including the dividend," says Jeffrey Schoenborn, a Bristol-Myers spokesman, whose company is developing contingency plans for a Plavix ruling. Plavix produced $980 million in third-quarter sales, or 20% of corporate revenue.

The quarterly payout is 28 cents a share, a level it has held for four years. Meanwhile, Bristol-Myers remains in the Wall Street doghouse, as only one out of 25 analysts who cover it has a buy rating, according to Thomson First Call.

Litigation made Wyeth (WYE) face a dividend decision in the late 1990s and early 2000s because of legal liabilities related to the diet drugs Pondimin and Redux, which were withdrawn from the market in 1997.

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