Merck

(MRK) - Get Report

made good on last week's earnings forecast, but Wall Street continues to fixate on the company's murky executive succession and dividend plans.

Merck shares were flat in midday action after the big drug company

topped first-quarter estimates and guided its second quarter toward the high end of expectations.

The drug company, whose sales and earnings fell from a year ago due to the Sept. 30 withdrawal of its Vioxx arthritis drug, also issued a full-year earnings estimate that is broadly in line with forecasts.

Peppered by questions from analysts about the dividend, a company spokesman said Thursday that Merck is "committed to the dividend" and that the dividend policy "remains unchanged." Payment of a dividend "is an absolutely critical vehicle for returning value" to shareholders, said Merck's Graeme Bell.

Investors have wondered about the fate of the payout ever since Merck yanked Vioxx last fall. The company currently pays an annual dividend of $1.52, yielding a recent 4.5%. That's rich in the current market, considering that few rivals pay more than 2%-3% and in light of the scale of possible Vioxx liability.

Bell added that the process continues as planned for choosing a successor to CEO Raymond V. Gilmartin, who is set to retire in March. Bell said a new CEO should be chosen by year-end.

Skeptics

The Whitehouse Station, N.J., pharmaceutical giant earned $1.37 billion, or 62 cents a share, in the latest quarter, compared with $1.62 billion, or 73 cents a share, a year ago. Sales fell 5% from last year to $5.4 billion in the 2005 quarter. Excluding Vioxx, sales rose 8% from a year ago.

Analysts surveyed by Thomson First Call were apparently unconvinced Merck would fulfill the forecast it made April 13, when it pegged the 62-cent bottom line. Their EPS estimate remained 59 cents a share heading into Thursday's report. Analysts had also been forecasting revenue of $5.28 billion in the quarter.

The company reiterated its explanation for the first-quarter upside, saying earnings benefited from lower marketing and administrative expenses, favorable foreign currency translation, and higher-than-expected revenue from a joint venture with

AstraZeneca

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.

Merck issued relatively bullish guidance Thursday, putting second-quarter earnings at 60 cents to 64 cents a share. Analysts had been forecasting 61 cents a share. For the full year, Merck put earnings at $2.44 to $2.52 a share. Analysts surveyed by First Call had been expecting $2.48 a share.

Merck said the number of Vioxx product liability lawsuits has grown to 2,300 as of March 31. In addition, there are 225 class action lawsuits alleging injury or economic loss. There are other lawsuits filed against the company or directors and officers alleging violations of federal securities law, seeking claims under federal law that covers retirement plans and asserting breach of fiduciary duty.

The first Vioxx trials are scheduled for May 23 in Alabama and May 31 in Texas. Merck has filed a motion for summary judgment to dismiss the Alabama case; a hearing is scheduled for April 26.

Merck didn't add to its litigation reserves during the first quarter. The amount remains at $675 million, which covers only legal defense costs -- not the cost of possible settlements or other payments to plaintiffs.

The dividend has been a constant source of speculation ever since Vioxx was removed from the market. But there's little way to assess the dividend's fate until a clearer picture of Vioxx liabilities emerge.

Even bond-rating firms, which have cut Merck's credit ratings in recent months, aren't sure. For example, Standard & Poor's says Merck has a "superior financial profile" that is "tempered by the uncertain magnitude and timing" of Vioxx litigation. And Moody's Investors Service praises Merck for a "healthy" balance sheet; but it adds that if pretax litigation costs exceed $10 billion, it might downgrade Merck's credit rating again.

Insurance Worries

The company reiterated that it is embroiled in a dispute with certain insurers over whether their policies cover Vioxx-related claims. The dispute is in arbitration, and the insurers are trying to cancel policies and deny their obligations, Merck says.

"There are likely to be additional disputes," Merck says. The company adds that "it is reasonably possible" that its insurance policies "will not be adequate to cover its defense costs and any losses."

Merck has $630 million in insurance to cover product liability claims after deductibles and co-insurance. It also has $190 million in insurance to protect directors and officers from securities- and shareholder-related lawsuits, and it has $275 million in coverage against suits making claims under federal retirement security law.

Asked about the prospects of Vioxx returning to the market, Bell said that Merck "looks forward to discussions" with the Food and Drug Administration. He offered no details or timetable.

Earlier this month, the FDA announced a

series of restrictions for both prescription and over-the-counter drugs for relieving pain and treating arthritis. Those restrictions included the strongest so-called black box warning for prescription products relating to cardiovascular risk and the risk of gastrointestinal bleeding.

The agency also asked

Pfizer

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to suspend sales of Bextra because its risks -- most notably a rare but dangerous skin infection -- outweighed its benefits. Pfizer agreed to pull the drug, but it says it will discuss the prospects of Bextra's return with the FDA. Pfizer's Celebrex will carry the new, stronger warnings.

The FDA said makers of nonprescription pain relievers also should put heart-risk and stomach-risk warnings on drug labels.

If Merck wishes to bring Vioxx back to the market, it must file an amended application to the FDA with a new label. Vioxx would be subject to an extensive review and another review by an advisory panel.

Merck received

some encouragement in February, when two FDA advisory committees, meeting jointly, voted 17-15 to recommend that Vioxx be returned to the market under restricted circumstances.

The FDA isn't bound by advisory panels' recommendations, but it usually follows their suggestions. However, there is little precedent for the FDA reconsidering a drug that was withdrawn by its sponsor for safety reasons. Given the publicity about Vioxx and safety issues identified in medical journals and advisory panels' debate, the agency review will take a long time.

Another Merck arthritis drug, Arcoxia, remains under FDA review as the company continues testing it. Arcoxia is a Cox-2 inhibitor, as are Vioxx, Celebrex and Bextra. Given the concerns over other Cox-2 drugs, there's little chance Arcoxia will reach the U.S. market soon.

The drug is sold in 54 countries, and Merck said Thursday it is working with foreign regulators to revise product labeling "based on the latest scientific data." First-quarter sales were $57 million vs. $30 million during the same period a year ago.

Sales of Merck's biggest drugs had a mixed performance in the first quarter. Cholesterol blockbuster Zocor saw revenue slip 15% from a year ago to $1.1 billion, reflecting the emergence of competition in the statin market.

Asthma treatment Singulair generated $735 million in revenue, up 18% from a year ago, while its blood pressure franchise Cozaar/Hyzaar produced $719 million, up 14% from a year ago. Fosamax, for osteoporosis, posted revenue of $772 million in the quarter, up 2% from a year ago.