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Merck Surges as Outlook Improves

A Goldman upgrade outweighs a drug setback.

Updated from 7:30 a.m. EDT


(MRK) - Get Merck & Co., Inc. Report

surged nearly 7% Friday as Wall Street continued to applaud the company's improved profit guidance.

Goldman Sachs upgraded the stock to neutral from sell, citing strong execution. The upgrade came a day after Merck boosted earnings forecasts, and the outlook was just hours after a panel of medical experts emphatically recommended that the company's Arcoxia pain reliever shouldn't be approved by the Food and Drug Administration.

Shares of Merck had slipped in Thursday's after-hours trading on reports of the FDA advisory committee's opinion, but they rallied on the raised targets. Recently, they were up $3.09 to $49.45.

Merck said it now expects to earn 84 cents a share before items in the first quarter, up from prior expectations of 63 cents to 67 cents a share. For the full year, the company now expects to earn $2.75 to $2.85 a share excluding items, compared with its previous forecast of $2.55 to $2.65 a share.

Aside from Goldman, another research firm also had positive comments on Merck. BMO Capital initiated coverage of the stock with an outperform rating and gave it a $53 price target.

On Thursday, the FDA advisory committee voted 20-to-1 against Arcoxia, which is available in more than 60 countries as an arthritis treatment, saying potential cardiovascular risks outweighed the possible benefits. The FDA isn't bound by advisers' recommendations, but it usually follows them.

"We are disappointed in today's outcome," Merck said in a statement after the close. "We continue to believe that Arcoxia has the potential to become a valuable treatment option for many Americans suffering from osteoarthritis. We are committed to continuing to work with the FDA to discuss the application in an effort to gain U.S. regulatory approval for Arcoxia."

Just days before the vote, the agency made public a policy statement saying that any new pain reliever would have to meet tougher guidelines than had been applied to previous arthritis drugs.

"A new product that appears to have an increased overall risk profile for cardiovascular disease, particularly beyond that seen with other drugs in the class, would not be appropriate for marketing approval unless the product fills an unmet need for a particular patient population," the agency says.

The FDA says it would approve a new pain reliever only if these patients can't find "relatively safer" drugs. Additionally, the FDA won't approve such a drug unless it offers "a reasonable risk-to-benefit balance" for that group of patients.

Even if the agency overruled the panel and approves Arcoxia, the drug probably would carry so many restrictions that it wouldn't be a major source of revenue. Arcoxia had worldwide sales of $265 million last year.

By comparison,


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Celebrex produced $2 billion last year. Merck's Vioxx had revenue of $2.5 billion in 2003, its last full year on the market.

Like Vioxx and Celebrex, Arcoxia belongs to the COX-2 inhibitors class. Merck removed Vioxx from the market in September 2004 for safety reasons, and Pfizer pulled another COX-2 drug, Bextra, in April 2005 after the FDA said the risks exceeded the benefits.

Merck is defending itself against thousands of Vioxx-related lawsuits, but the company received some positive news on that front in recent days as a federal judge in New Jersey dismissed a securities class action filed by investors against the Whitehouse Station, N.J., drug giant.

Separately, a Texas judge is expected to issue a ruling, possibly next week, that could hurt the plaintiffs in 1,000 Vioxx cases filed in that state,

The Wall Street Journal

reported. The judge in one case told lawyers for both sides that the complaint will be dismissed based on a new FDA rule regarding drug warnings, the report said.

Celebrex remains on the market with tougher warnings on its label about heart-disease risk. Older prescription and nonprescription pain relievers, known as nonsteroidal anti-inflammatory drugs, also carry such warnings.

In making its pitch to the FDA and its advisory panel, Merck said clinical trials showed that Arcoxia posed the same cardiovascular risk as diclofenac, an older pain reliever sold under the brand name Voltaren by


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and by many generic-drug makers.

Critics say diclofenac was a bad comparison , arguing that it has higher heart risks than some pain relievers, such as naproxen. Merck said it chose diclofenac because it is the world's most popular pain reliever.

The advisory panel made its decision after reviewing

an FDA staff report on Merck's clinical trials. The report said Arcoxia met its goal of having a similar risk of serious side effects, such as blood clots, when compared with diclofenac, but it also said patients had a "significantly higher risk" of high blood pressure, congestive heart failure and fluid build-up.

Merck will continue to market Arcoxia outside the U.S.