Updated from 11:45 a.m. EDT

Shares of

Merck

(MRK) - Get Report

and

Pfizer

(PFE) - Get Report

declined Thursday as criticism continued about the class of arthritis and painkiller drugs known as COX-2 inhibitors.

Shares of Merck, which last week said it was pulling its COX-2 drug Vioxx from the market immediately, fell another 66 cents, or 2.1%, to $31.01. The stock dropped as low as $30.18, a new 52-week low. The stock closed at $45.07 on Sept. 29, the day before the company said it was removing Vioxx from the market because it presented a higher risk of heart problems.

Shares of Pfizer, which issued a detailed account Saturday asserting that its Celebrex and Bextra COX-2 drugs are safe, fell $1.27, or 4.1%, to $29.91. The stock sank as low as $28.60, also a new 52-week low. Analysts had expected Pfizer to capitalize on Merck's Vioxx woes. But Pfizer was trading Thursday just below the level it closed on Sept. 29.

Pfizer was the second most actively stock traded on the

NYSE

, while Merck ranked third. Some 71.6 million shares of Pfizer changed hands, or 4 times their daily average. Merck trading volume was 40.2 million shares, also about 4 times its daily average.

Trading in Pfizer and Merck helped drag down the Amex Phamaceutical Index to a new 52-week low early Thursday, as all 15 of its components fell.

At one point, the index slipped to 299.65, or 5 points lower than the previous 52-week low. "I think this is an overreaction by investors in the other companies," said Sena Lund, a drug industry analyst at Cathay Financial, an investment research firm. By midafternoon, the index stood at 302.82, down 2.4% for the day.

Merck pulled Vioxx after receiving the results of a long-term study assessing the drug's impact on colon polyps. But during the three years of research, scientists found an "increased relative risk for confirmed cardiovascular events," such as heart attack and stroke, beginning after 18 months of treatment in the patients taking Vioxx compared with those taking a placebo.

Pfizer said Saturday that "the evidence distinguishing the cardiovascular safety of Celebrex has accumulated over the years in multiple completed studies, none of which has shown any increased cardiovascular risk for Celebrex."

The latest stock market action for both stocks appears to be a reaction to two articles published on line ahead of their inclusion in the Oct. 21 edition of the

New England Journal of Medicine

. In one editorial, Dr. Garret A. FitzGerald urged the Food and Drug Administration to examine all of the COX-2 drugs. FitzGerald is a medical researcher at the Institute for Translational Medicine and Therapeutics at the University of Pennsylvania. "We must remember that the absence of evidence is not the evidence of absence," said FitzGerald, who has received consulting fees and research support from Merck.

FitzGerald, however, didn't advocate banning all COX-2 drugs for all patients. These drugs "remain a rational choice for patients at a low cardiovascular risk who have had serious gastrointestinal events, especially while taking traditional

pain relievers. It would also seem prudent to avoid

COX-2 drugs in patients who have cardiovascular disease or who are at risk for it."

Another

New England Journal of Medicine

article was written by a cardiologist, Dr. Eric J. Topol of the Cleveland Clinic, who has been a long-time critic of Vioxx. He called for a congressional investigation of the Vioxx approval process and the relationship between Merck and the Food and Drug Administration. "The senior executives at Merck and the leadership at the FDA share responsibility for not having taken appropriate action and not recognizing that they are accountable for public health," he charged.

Lund said Topol and FitzGerald "are not writing anything new" in terms of science. But "putting the facts together" and having them published in a major scientific publication gives their opinions added impact, especially in light of Merck's decision to remove Vioxx from the market, Lund said.

In explaining its Vioxx recall last week, Merck said that although there was no statistically significant health safety issue during the first 18 months of the decisive study, the company decided to pull Vioxx from the market -- the largest withdrawal of a prescription medical product in U.S. history in terms of revenue. Vioxx contributed $1.3 billion in sales for the first half of this year.

Since the recall, Pfizer has taken great pains to stand by its drug. In its Saturday news release, the company said that each COX-2 drug has a distinct chemical structure, "and we would not expect them to have the same side-effect profile," the company added. "The data we've accumulated over time demonstrate that Celebrex does not increase the risk of serious cardiovascular events in patients with arthritis and pain, even at higher-than-recommended doses."

Celebrex had sales of $1.5 billion for the first half of 2004; Bextra had sales of $545 million.

Pfizer accounts for 20% of the weighted pharmaceutical index and Merck accounts for 6%. Some of the other big percentage losers include

Schering-Plough

(SGP)

(down 2.5%);

Bristol-Myers Squibb

(BMY) - Get Report

(down 3%) and

Johnson & Johnson

(JNJ) - Get Report

(down 2.5%).

How Much More Pain for Merck?

Judging from their initial reactions, analysts seem torn between recommending Merck as a distressed stock price -- thanks to a strong balance sheet, what they believe is a safe dividend and their hopes for a turnaround in 2007 -- and telling clients to find something else because the stock might be affected by lawyers and regulators. Three investment banking firms have raised their ratings on Merck since the Vioxx announcement, and two have cut their ratings. All five now have neutral ratings on Merck, as do most other analysts.

One immediate concern is what happens to Arcoxia, the next-generation COX-2. After Merck pulled Vioxx, the company reaffirmed its desire to seek regulatory approval for Arcoxia in the U.S. The drug is available in 47 countries and is under review by the Food and Drug Administration. The FDA is scheduled to respond in late October.

Merck officials say they will continue pursuing the marketing of Arcoxia, arguing, just like Pfizer has done, that tests of one COX-2 drug cannot be extrapolated to another. Merck said last week that it will work with regulators in the 47 countries "to assess whether changes to the prescribing information ... are warranted."

That didn't offer much encouragement to Mara Goldstein of CIBC World Markets, who is neutral on Merck. "The prospect of Arcoxia

is greatly diminished, in our view," she wrote to clients a day after Merck said it was removing Vioxx from the market. Noting that safety data longer than 12 months "is not readily available," Goldstein said she doubted the FDA would approve the drug at this time. "Even with approval, the commercial potential is likely to be seriously blunted until such data is available," she said.

Goldstein said she was removing potential U.S. sales of Arcoxia from her earnings model until 2007. (Her firm says it seeks or expects to receive investment banking compensation from companies covered in research reports; she owns shares in Merck.)

Another source of potential pain is litigation. Although some analysts have pointed to the heavy legal expenses incurred by

Wyeth

(WYE)

in settling

lawsuits related to the fen-phen diet drugs, analysts say Merck's legal situation is murky.

"Liability concerns are overblown, but expect

the topic to continue to negatively impact valuation," said Joseph P. Riccardo, of Bear Stearns, in an Oct. 1 research report, as he raised his rating to peer perform from underperform. His new rating "means don't sell" because the dividend "is relatively secure and

the balance sheet is strong."

Riccardo criticized fellow analysts for calculating how many Vioxx pills were sold, extrapolating test results to these patients and then trying to come up with a legal liability number. Such calculations "may only serve to inflame the market," he said.

Although plaintiffs' attorneys "may win some money from sympathetic judges and juries," Riccardo said the only way liability costs would grow out of control would be for "large numbers of people" to be seriously harmed. "And more important," he added, "there has to be a smoking gun," such as a revelation that Merck "knew and covered it up." (He doesn't own shares; his firm has provided non-investment banking services for Merck.)

Merck's most recent 10-K report notes that the company is subject to a number of Vioxx-related suits alleging injuries such as heart problems and kidney damage. The lawsuits have been filed in federal courts and several state courts, Merck says. The company says these lawsuits are "without merit" and will "vigorously" fight them -- comments that were repeated by Merck officials when they announced that Vioxx was being removed from the market.

"We believe it's impossible to estimate the Vioxx litigation risk," said David R. Risinger, a Merrill Lynch analyst, in a research note to clients Sept. 30. Risinger has a neutral rating on the stock.

He said it was tough to compare Vioxx to Wyeth's fen-phen, which was linked to heart valve disease. He said Wyeth has taken $16 billion to $17 billion in charges and has paid out over $13 billion related to the lawsuits. Because litigation is continuing, Wyeth could incur more costs.

Because a "significant percentage" of Vioxx has been taken by patients for a short period of time and because the higher risk of heart problems has been linked to long-term use, he said plaintiffs' attorneys will have a more difficult task than the lawyers representing fen-phen patients. (His firm is a market maker in Merck's stock and expects to seek or receive investment banking fees from Merck within the next three months. His report says "one or more analysts" responsible for the report owns shares in Merck.)

What About Pfizer?

While Pfizer has defended the safety of its COX-2 products, at least two analysts have upgraded their ratings on the stock based on the theory that Merck's pain will be Pfizer's gain.

"Celebrex and Bextra demand is off the charts," said David Moskowitz, who raised his rating on Pfizer to outperform from market perform, in a report to clients Wednesday. "Based on our trade sources, demand for Celebrex and Bextra is soaring at the wholesale level, and premiums are being paid for supplies of the product. We believe that Pfizer is shipping all it can at this point."

Moskowitz said the data from NDC Health, which monitors prescriptions, show that 58% of the initial switches from Vioxx are going to the Pfizer products while other people were seeking to switch to other painkillers such as naproxen.

"Given that Celebrex is in the same class as Vioxx, there have been concerns that Celebrex might also harbor some unrecognized safety issues," he said. However, Moskowitz said that independent safety committees supervising three ongoing COX-2-related trials showed "no indications of any increased cardiovascular risk among study patients in any of the trials." (He doesn't own shares; his firm doesn't have an investment banking relationship with the company.)

One analyst with what could be termed a cautious buy recommendation is Robert Hazlett, of SunTrust Robinson Humphrey. "Though the jury is still out, and the FDA may certainly ask that more clinical work be completed, we apply only a small probability to the risk that Celebrex will be saddled with the same types of negative cardiovascular effects that Vioxx has shown," he said in a research report issued Monday. "We expect investor response to near- and medium-term Celebrex prescriptions to be positive."

Hazlett said he expected the withdrawal of Vioxx would add $195 million to Pfizer's COX-2 product sales this year, pushing revenue to $4.48 billion. But the real gains will come in 2005, 2006 and 2007. Next year, for example, Vioxx refugees could add $1.1 billion to Pfizer's COX-2 revenue, boosting sales to $5.74 billion. (He doesn't own shares; his firm has had a non-investment banking relationship with Pfizer.)