Although investors may be nervous about
defeat in its first Vioxx lawsuit, bond-rating agencies aren't worried -- yet.
On Tuesday, Moody's Investors Service said the
$253.4 million wrongful death judgment vs. Merck by a Texas state court jury wouldn't affect $7.5 billion in debt or the company's long-term ratings.
Moody's decision follows by one day comments from Standard & Poor's that the legal loss, which Merck says it will appeal, won't affect the company's credit ratings for now.
Moody's cut its long-term credit rating on Merck to Aa3 from Aa2 in January, which still reflects a "high grade" designation, just three notches below a "gilt-edged" rating of Aaa. The outlook remains negative.
"Although this development increases the negative pressure on Merck's rating," Moody's says it is reaffirming the current Merck ratings because it expects "good cash flow from operations for the next several years
and very healthy cash coverage of debt."
Moody's figures that any Vioxx-related lawsuit payments will be made over 10 years, "and will not be significant over the near term." The ratings agency
says it can't use the Texas case as a guideline for predicting the results of lawsuits in other states and in federal court.
Moody's current rating reflects an estimated $10 billion Vioxx legal bill. On Wall Street, forecasts of the drug giant's ultimate monetary liability have varied widely. Like investment banking firms, Moody's expects the punitive damage award of $229 million to be knocked down drastically because it exceeds the limits of Texas law.
As of June 30, 4,100 individual personal liability lawsuits and 120 class-action lawsuits have been filed against Merck. Analysts and legal experts predict the company's loss in Texas will encourage more people to sue. Merck also is being sued in many foreign countries.
Moody's notes that three of Merck's key financial ratios -- cash flow from operations to debt, free cash flow to debt, and cash and investments to debt -- remain in the Aaa ranges of its pharmaceutical peers.
"Although cash flow has been reduced because of the Vioxx withdrawal and will likely deteriorate in 2006 because of the U.S. Zocor patent expiration, Moody's expects over $6 billion of cash flow from operations in both 2005 and 2006," the ratings agency says.
Zocor, a cholesterol drug, is Merck's bestselling product. The company pulled Vioxx from the U.S. and world markets on Sept. 30, citing clinical trials results that showed Vioxx-takers had a higher risk of cardiovascular problems after using the drug for more than 18 months.
On Monday, S&P said it was keeping its AA-minus rating on Merck with a negative outlook, which means the rating may be lowered. The top rating is AAA, and AA-minus reflects the lowest range in the category of "very strong capacity to met financial commitments."
Like Moody's, S&P says
it cannot predict future awards based on the Texas case. "If litigation damages in this case and others are sustained at very high levels, however, the financial impact could eventually affect the company's creditworthiness," S&P says.
The ratings firm adds that Merck "continues to maintain a very conservative financial profile and a high level of liquidity, and the company is expected to continue to generate strong cash flows over the intermediate term."
Merck continued to trade actively on Tuesday. The stock was off 30 cents to $27.59. About two hours after markets had opened, around 8 million shares had been traded, or roughly the average daily trade for the last three months. That average keeps inching upward, thanks to Friday's trading of 38.4 million shares and Monday's volume of 46.9 million shares.