meets the investment community Tuesday seeking to focus on topics other than Vioxx, but don't expect the company to tout any single product -- or even group of products -- that will reverse its tailspin for several years.
Last week, the company made
financial predictions for the rest of 2004 -- earnings per share in the range of $2.59 to $2.64 -- and for 2005, EPS in the range of $2.42 to $2.52. The company also offered predictions for its biggest products, such as the cholesterol drug Zocor and the osteoporosis drug Fosamax.
On Tuesday, Merck will discuss future prospects, for which analysts had mostly ho-hum reactions prior to the company's Sept. 30 announcement that it was withdrawing Vioxx. Now, these prospects take on a greater relative prominence even if Wall Street's views haven't changed.
"The upcoming analyst meeting should improve visibility, though short of negative news, we expect negligible impact on the stock," said Chris Shibutani of J.P. Morgan in a recent report to clients.
Shibutani expects the combination of patent expirations on big products in the next few years, the Vioxx setback and the modest revenue from new products to keep Merck's yearly earnings below that of 2003 "until at least 2008." Earnings for 2004 and 2005 will decline thanks to Vioxx; earnings will remain flat in 2006 and 2007 thanks to the mid-2006 U.S. patent expiration on Zocor.
"Beyond the naming of a new CEO, we see few potentially positive catalysts," said Shibutani, one of 24 analysts with a neutral rating on the stock. (There are three buys and one sell, says Thomson First Call.) Merck CEO Raymond V. Gilmartin reaches the mandatory retirement age in early 2006.
Even before the Vioxx recall, Merck had its share of setbacks, canceling clinical tests for four once-promising compounds -- for pain, diabetes, asthma and anxiety -- last year.
Meanwhile, some sources of potential near-term good news have qualifications. Two of the most promising drugs in the Merck pipeline are muraglitazar for diabetes and gaboxadol for insomnia, a very crowded field. Neither drug is home-grown. Earlier this year, Merck signed marketing and development deals with
for the diabetes drug and with the Danish company
for the insomnia drug.
"While both late-stage compounds have blockbuster potential, the share profitability inherent to partnered arrangements mutes the impact to earnings," Shibutani said. Merck and Bristol-Myers Squibb expect to file an application with the Food and Drug Administration for the diabetes drug by year-end. If all goes well, Shibutani expects the drug to reach the market in late 2005. (Shibutani doesn't own shares; J.P. Morgan has an investment banking relationship with Merck.)
Merck's other potentially favorable headline is its vaccine business. Merck recently sought FDA approval for Proquad, a four-disease product that incorporates chicken pox into an existing vaccine for measles, mumps and rubella (German measles). During the second half of 2005, Merck expects to seek FDA approval for three other vaccines protecting against rotavirus, a contagious virus that causes gastroenteritis; reducing the risk of human papillomavirus (HPV), which is linked to cervical cancer and genital warts; and reducing the pain associated with shingles.
Noting that Merck's vaccine business achieved more than $1 billion in sales last year, Shibutani said a best-case scenario could result in Merck's vaccines contributing triple last year's revenue amount by 2009.
Despite its setbacks, or maybe because of them, some analysts believe Merck will continue to invest heavily in research and development. Although the company recently said next year's R&D spending will match this year's, Prudential Equity Group analyst Tim Anderson predicts the rate of R&D spending growth will be higher than sales growth through 2009. He told clients recently he expects an average annual R&D spending increase of 5%.
Anderson, who is neutral on the stock, said this R&D policy reflects a trend among Big Pharma companies. In order to find "new, novel therapies that can command premium pricing," they are investing heavily in R&D because they believe that this is the solution "to bottom-line challenges," he said. (Anderson doesn't own shares; his firm doesn't have an investment banking relationship.)