Updated from 2:55 p.m. EDT
Compared with last year, any mutual fund fallout from
legal loss in Texas may be relatively minor.
Pharmaceutical sector funds bled money when Merck shares
plunged 26% last year after the painkiller Vioxx was pulled off the market in September.
A repeat isn't necessarily in order, but that's not to say shareholders won't feel any pain this time around, particularly with so many unknowns about the future of the litigation the company is facing.
At the very least, what bears noting are some of the funds that have large stakes in Merck. After all, they're the ones who have the most potential to lose from their Merck bets, or perhaps the most to gain if they hang in there and things start going the company's way.
"A lot of value-oriented managers expected bad news would follow even after they scooped up some shares," said Christine Benz, associate director of fund analysis at Morningstar. Managers bought the stock when it was "priced such that it could fall further and could remain above their estimate of fair value," she says.
Of the top mutual fund holders, Franklin Templeton's
Franklin Income Fund, according to
data, holds $1.06 billion in Merck shares, making up 3.2% of the fund's net assets. The Franklin Income Fund owns 34 million Merck shares.
Franklin Templeton was contacted for comment, but managers won't talk about individual stocks.
Robert Millen, portfolio manager for the $3 billion
Jensen fund, says the size of the award -- $253.4 million to the plaintiff -- was probably what caught people off guard.
"I would be surprised if they adjust the dividend downward," he said of the company's quarterly payment to shareholders. "They have a lot of cash, but the appeals process will take a long time."
Millen's fund sold its Merck shares after Vioxx was pulled from the shelves, thinking the company would be distracted by the litigation. That ended up being correct. The fund originally bought its Merck shares in 1992.
"We would look at the stock again once they get this litigation behind them and prove once again, through an increased pipeline of new drugs, that they are indeed a growth company," Millen said.
Another current big holder, the
Vanguard 500 Index fund, owns $680.9 million in Merck stock, or more than 21 million shares. The Merck stake makes up 0.66% of the fund's net assets. The Vanguard group couldn't be reached for comment.
Adding to Vanguard's potential exposure to a Merck share slump is the fact that its
Institutional Index Fund holds $328 million of the drugmaker's stock, with a stake of 10.1 million shares.
Elsewhere, American Funds'
Washington Mutual Investors Fund controls 20.5 million Merck shares worth about $662.6 million, making up 0.89% of its portfolio. The
Income Fund of America holds 19.1 million Merck shares, a stake that makes up 1.16% of its portfolio.
Merck's shares sank 8% Friday when an Angleton, Texas, jury found the company negligent in its marketing practices for Vioxx. The drug, shown to increase a user's risk of heart problems, killed Robert Ernst, his wife alleged. Merck plans to appeal the verdict.
Neil Hennessy, portfolio manager for the $91 million
Hennessy Total Return fund, believes Merck's "attorneys will surely improve their approach after their first loss."
Merck has said it plans to defend itself against each one of the Vioxx lawsuits. As of June 30, the company was a defendant in 4,100 personal injury lawsuits involving 7,500 plaintiff groups, plus 120 class-action personal injury lawsuits.
"The jurors tuned Merck's lawyers out because the language they used in their defense was too technical," Hennessy said. "I would assume they will do a better job of explaining the case more simply the next time."
Hennessy's fund has 4.3% of its assets in Merck, since it's a "Dogs of the Dow" fund, but it's a relatively small holder, having just 0.01% of all Merck shares outstanding.
Trevor Polischuk, co-portfolio manager for the $2.5 billion
Eaton Vance Worldwide Health Sciences fund, was out of Merck well before the Vioxx issue raised its ugly head. He holds no shares now.
"Our bearish stance on Merck is about their growth prospects, not their legal prospects," he said. "Two of their big five drugs, Zocor and Fosomax, are coming off patent in the next few years, which leaves them with an underwhelming pipeline."