Merck & Company’s decision to stop selling the painkiller Vioxx, one of its most profitable drugs, could hardly have come at a worse time for the company.
Even before its surprise announcement yesterday, experts said, Merck had lagged behind Pfizer, the industry leader, in increasing its profits. The withdrawal of Vioxx is a big blow to a company that has long prided itself on its successes in developing new drugs.
Analysts said yesterday’s news, coupled with concerns about Merck’s ability to find successor drugs to its aging top sellers, could even force it into a merger. Raymond V. Gilmartin, the company’s chief executive, however, roundly rejected that possibility yesterday when he was challenged by a reporter, stressing that the company was financially solid “with a strong cash flow.”
Shares of Merck plummeted 27 percent in heavy trading yesterday, dropping $12.07, to close at $33. Merck is a component of the Dow Jones industrial average and it was a big factor in that indicator’s loss of 55.97 points yesterday, to close at 10,080.27. Pfizer, which makes Celebrex, a competing painkiller in the class known as COX-2 inhibitors, gained 42 cents, to close at $30.60.
Vioxx had $2.5 billion in worldwide sales last year, about 11 percent of Merck’s total revenues, and it contributed even more to profits. The company does not break out the share of earnings attributable to individual products but analysts estimated that Vioxx accounted for about $1.2 billion in 2003, or 18 percent of Merck’s $6.59 billion net income.
Sales of Vioxx, which is commonly used for arthritis pain, dropped $148 million in the second quarter, to $653 million, down from $801 million in the quarter last year.
Adding to its troubles, Merck, the world’s third-largest drug maker after Pfizer and GlaxoSmithKline, faces the challenge of replacing its top-selling drug Zocor, the cholesterol-lowering treatment, which will lose patent protection in 2006.
Mr. Gilmartin’s position at Merck has also been challenged. In announcing the Vioxx move, Mr. Gilmartin brushed aside a reporter’s suggestion that he might have to resign. But Barbara Ryan, an analyst at Deutsche Bank, said Mr. Gilmartin would have to make a drastic change in strategy to survive.
After many years of creating some of the drug industry’s biggest sellers, Merck’s pipeline of new products has slowed and Mr. Gilmartin has had to find alternative approaches to drug development. Merck has joined research partnerships in dozens of deals over the last two years, Mr. Gilmartin said yesterday.
The company told analysts yesterday that it expected to take a charge of $700 million to $750 million in the second half of this year to cover the costs of withdrawing Vioxx, including customer returns of pills sold, lost future sales and writing off the value assigned to inventory.
The company, which had forecast earnings of $3.11 to $3.17 a share for 2004, said the withdrawal of Vioxx would reduce annual earnings 50 cents to 60 cents a share.
The charges to be taken because of Vioxx do not include potential payouts in scores of personal injury lawsuits by former users who say the drug caused cardiovascular injuries. Andy Birchfield, a plaintiffs’ lawyer in Montgomery, Ala., said he had filed 58 cases, including more than 40 in New Jersey courts. Merck is based in Whitehouse Station, N.J.
Mr. Birchfield says the case of William Cook, 50, a retired coal miner who had been using Vioxx for chronic joint pain and had a heart attack in October 2000, has been scheduled for trial in December.
Ira S. Loss, a drug industry analyst with Washington Analysis, said that by taking Vioxx off the market, Merck was “trying to minimize its legal liability exposure” by acting promptly after receiving the report.
Mr. Gilmartin says two million patients around the world are currently using Vioxx, which was approved by the federal Food and Drug Administration in 1999. Some 84 million people in 80 countries have used it.
Kenneth C. Frazier, general counsel for Merck, said the lawsuits included two class-action suits seeking punitive damages. A company’s liability insurance typically does not cover awards of punitive damages. Mr. Frazer said one or more cases might proceed to trial in the first half of 2005. “The company continues to believe that these lawsuits are without merit,” he said.
Merck said it first learned last week that a three-year study involving 2,600 patients had found that after 18 months, those taking Vioxx daily had twice the risk of heart attacks or strokes—15 per thousand—compared with patients who were taking a placebo. There was no difference in the number of heart attacks and strokes for the two groups in the first 18 months of the study, the company said. Five patients died in each group over the three years.
Merck executives said they analyzed these findings on Sunday and Monday and informed members of the Merck board on Tuesday. Dr. Peter S. Kim, president of Merck’s research unit, said company officials ‘’later met with F.D.A. regulators and informed them and subsequently began to inform other regulatory agencies around the world.”
Analysts said that a further obstacle for Merck could come from federal regulators, who would now be more likely to require longer-term studies before approving its new drug Arcoxia, which is also in the COX-2 class. Arcoxia, which is considered a successor to Vioxx, is on sale in 47 countries.
The blow to Vioxx “may very well knock out Arcoxia’s chances of coming to the U.S.,” said Neil B. Sweig, an independent drug securities analyst.
Mr. Gilmartin and Judy Lewent, chief financial officer of Merck, said yesterday that the company was financially sound and that there were no plans to cut the quarterly dividend, which was recently raised by 1 cent, or to change the company’s plans to repurchase stock.
Mr. Gilmartin said Merck would not need to close factories or fire sales representatives because it would need them for new products. The company will delay some capital spending on new production lines that would have been needed had it continued to produce Vioxx.