Vioxx Charges Hit Merck

The firm meets analysts' earnings estimates but moves to cover legal costs for its drug recall.
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Updated from 8:14 a.m. EST

Merck

(MRK) - Get Report

said Tuesday that it had taken a charge of $604 million during the fourth quarter of 2004 as a reserve to cover litigation expenses related to the withdrawal of Vioxx from the market on Sept. 30.

Merck said the reserve covers future litigation expenses. The company, adding that the total reserve related to litigation expenses is now $675 million, however, said the reserve is unrelated to potential liabilities emanating from lawsuits against the company in connection with Vioxx.

The litigation news accompanied Merck's release of its fourth-quarter financial results, in which the company reported a profit of $1.1 billion, or 50 cents a share, on revenue of $5.75 billion. The consensus view of analysts polled by Thomson First Call was a profit of $1.12 billion, or 50 cents a share, on revenue of $5.32 billion.

For the same period in 2003, Merck earned $1.4 billion, or 63 cents a share, on revenue of $5.63 billion.

For fiscal 2004, Merck earned $5.81 billion, or $2.61 a share, on revenue of $22.94 billion. Analysts polled by Thomson First Call had been predicting earnings of $5.85 billion, or $2.62 a share, on revenue of $22.54 billion.

Merck added that it expected first-quarter 2005 earnings per share to be in the range of 54 cents to 58 cents and that full-year 2005 EPS would be in the range of $2.42 to $2.52.

Last month, the company offered financial guidance of $2.42 to $2.52 for 2005.

The average estimate among Wall Street analysts was for a first-quarter 2005 EPS of 56 cents and $2.46 for fiscal 2005.

Despite the shadow of Vioxx, investors apparently liked what they saw in Merck's financial report Tuesday as they bid up the stock by 81 cents, or 2.8%, to $30.69.

Merck said its guidance for the first quarter of 2005 and the 2005 fiscal year doesn't take into account possible Vioxx-liability costs, the effect of new rules on accounting for stock options or the impact of a new law that allows companies to repatriate the earnings of their overseas subsidiaries during a one-year tax holiday. The law, signed by President George W. Bush, allows the foreign profits to be repatriated at a 5.25% tax rate rather than the customary 35% rate.

Graeme Bell, Merck's director of investor relations, told analysts Tuesday that the company is "currently continuing our planning" on how to use repatriated funds. He provided no details or timetable.

Bell said the first Vioxx-related trial is expected in the first half of this year, but he declined to speculate on the venue.

Merck added that the number of Vioxx-related lawsuits as of Dec. 31 had grown to 575, which include some 1,400 plaintiff groups alleging personal injuries caused by the arthritis drug. The company also has been named as defendant in some 70 class-action suits relating to personal injury claims. The company has been named as a defendant in 30 lawsuits involving claims of violations of federal securities laws and laws governing employee retirement plans. Merck said it has product liability insurance of up to $630 million for such claims.

"At this time, the company believes it is reasonably possible that its insurance coverage with respect to the Vioxx lawsuits will not be adequate to cover its defense costs and losses, if any," Merck said. The company also said it is the defendant in Vioxx suits filed in several European countries, Canada, Brazil, Australia and Israel.

Merck said its Vioxx-litigation reserve "is based on certain assumptions and is the minimum amount that the company believes at this time it can reasonably estimate will be spent over a multiyear period."

"We have stated previously that we intend to defend these lawsuits vigorously," said Kenneth C. Frazier, the company's senior vice president and general counsel, in a prepared statement. "This reserve is consistent with our commitment to defend the company."

Beyond Vioxx

"We are moving beyond the Vioxx withdrawal," said Raymond V. Gilmartin, the chairman and CEO, in a prepared statement.

The fourth quarter "was a solid quarter for Merck," said Bell, the investor relations chief, pointing to strong growth among many signature products.

For example, sales of the asthma drug Singulair rose 44% in the quarter to reach $731 million. For the year, Singulair revenue gained 30% to $2.6 billion. Sales of the osteoporosis drug Fosamax grew by 28% to $831 million for the quarter and by 18% to $3.2 billion for the year.

The blood pressure drugs Cozaar and Hyzaar produced $764 million in sales for the quarter, up 11%, and $2.8 billion for the year, up 14%. And the company's best-selling drug, Zocor, managed an 8% gain in the quarter to $1.3 billion in sales and a 4% advance for the year to $5.2 billion. This cholesterol-fighting drug has been losing patent protection in some countries, and its U.S. patent will expire in mid-2006.