Maybe patent expirations aren't such a big deal at

Merck

(MRK) - Get Report

.

The bluest of blue-chip drug companies dazzled the market Monday with stronger-than-expected second-quarter earnings and said it would beat Wall Street earnings forecasts for 2000. Shares surged 9.5% to 69 13/16 as analysts scurried to upgrade earnings models.

The key to Merck's success? Surging sales of Vioxx, the upstart competitor to

Pharmacia's

(PHA)

Celebrex arthritis drug. Now Vioxx is trouncing Celebrex in some foreign markets and threatens to do the same in North America.

"It looked like it was going to be a niche product, but now it's likely to be a $2 billion drug this year," says Mara Goldstein, analyst with

CIBC World Markets

, which rates Merck buy and does no underwriting for it. Vioxx, on the market for a year, generated $475 million in second-quarter sales. Celebrex posted $1.5 billion for 1999, but keep in mind that it was launched six months earlier. Sales of both drugs are likely to continue growing, however.

Broad-Based Strength

Other Merck drugs, like Zocor, the cholesterol-cutting competitor to

Pfizer's

(PFE) - Get Report

blockbuster Lipitor, were no slouches, either. Fueled by a giant direct-to-consumer advertising campaign, Zocor's second-quarter sales surged 20% to $1.3 billion, making it Merck's top-selling drug.

Of the nation's top drug companies, Merck is the ultimate "show me" stock, and now it seems to be showing. The stock, which has traded at as much as a 20% discount to the

S&P 500

this year, has been hobbled by worries over giant patent expirations to top-selling drugs, including three heart drugs -- Mevacor, Vasotec and Prinivil -- as well as Pepcid for ulcers. Patent expirations are nightmares for drug companies, as they can wipe out up to 80% of a drug's sales within a year, forcing drug makers to beat their unloved research and development staffs until they come up with replacments.

But now it seems this supertanker is learning to run on alternative fuel in the form of newer, fast-growing drugs including Vioxx, heart drugs Zocor and Cozaar/Hyzaar, osteoporosis drug Fosamax and asthma treatment Singulair. Even its less-profitable

Medco

pharmacy benefits unit is growing, expecting to boost its patient roster by 10 million patients, to 60 million, this year, even after rivals

SmithKline Beecham

(SBH) - Get Report

and

Eli Lilly

(LLY) - Get Report

dumped their own PBMs.

So Much for Sobriety

Normally sober Merck officials weren't reticent about harping on this recent success, doubtless hoping to infuse new confidence into a company that faces more patent expiration exposure in the next five years than any major rival. This year alone, U.S. patents for Vasotec and Pepcid expire, while Mevacor's ends in mid-2001.

Fully four times on Monday's analyst conference call, Laura Jordan, an investor relations director, repeated the new Merck mantra that 2000 earnings would top the range of analysts' forecasts of $2.76 to $2.81 per share. That prediction came after Monday's announcement that second-quarter earnings surged 20% to 73 cents a share, 4 cents higher than the consensus forecast -- and winning the "beating the consensus" game for drug company second-quarter 2000 earnings released so far.

"We are confident we will be able to continue to deliver growth comparable to our peers even when patents expire," Jordan repeatedly told analysts.

And unlike rivals Pfizer and

Glaxo Wellcome

(GLX)

, Merck has steadfastly rejected mergers and cost-cutting as a means to grow earnings in the face of patent worries, although it has bought back $2 billion worth of shares this year to boost earnings and may buy another $8 billion worth.

"Clearly the underlying profitability is higher than a lot of investors thought," said C.J. Sylvester, an analyst with

PaineWebber

who has an outperform rating on Merck and whose firm does no underwriting for it. "They have really raised the bar for themselves in terms of earnings next year."

All the Same

But success in selling new drugs isn't enough in today's supercompetitive drug industry. New drugs in development are paramount to maintaining confidence. And at least one Merck drug in development is facing delays.

Jordan said a promising experimental drug cryptically called "Substance P" is slow in enrolling depression patients, although clinical tests of the drug for chemotherapy-induced nausea are "very robust," she said. Investors are keenly interested in Substance P as a possible new depression drug to replace lost earnings from Prozac, the Eli Lilly drug whose patent expiration next year could drive down prices for rivals Paxil (from SmithKline) and Zoloft (from Pfizer).

"Patient enrollment is taking longer than expected because of strict entry requirements into the trial," says Jordan, declining to be more specific.