Merck & Co. (MRK) faces a rocky future after withdrawing its blockbuster arthritis pain drug Vioxx, a high-margin product that had accounted for almost 20% of its profit.

The drug’s withdrawal is the most serious problem of many confronting Merck. The move will wipe out billions of dollars of future revenue and will shave 50 cents to 60 cents off this year’s earnings, which were expected to range between $3.11 and $3.17 a share.

But beyond that, the patent on Merck’s biggest-selling drug, cholesterol treatment Zocor, expires in 2006. That same year, Merck Chief Executive Ray Gilmartin is due to retire, but industry experts see no clear successor, and now Merck’s entire future as an independent company is in question.

“This blow does not in any way reflect directly on (Merck’s) CEO, but he can no longer sit on his hands and wait out the remainder of his tenure,” Deutsche Bank analyst Barbara Ryan wrote in a Thursday research note. “A major strategic effort, either an acquisition or merger, is needed that could inject both pipeline potential and earnings for the short and long term.”

She went on to say Merck has “had a run of bad luck, but it can’t stand up and say it ain’t broke anymore. It is, and it needs to be fixed.”

Merck’s stock plunged more than 27% on news of the withdrawal, wiping more than $27 billion off its stock-market value. Pulling Vioxx, which reaped sales of $2.5 billion last year, is one of the most high-profile drug withdrawals ever, bigger even than Bayer AG’s (BAY) withdrawal of its cholesterol treatment Baycol in 2001.

Vioxx’s sales had already declined on concerns about the side effects, but the company needed all the revenue it could get to cushion the blow it will receive when Zocor goes off-patent.

The company had hoped that the Food and Drug Administration would approve a new pain drug called Arcoxia that is similar to Vioxx in the next few weeks, but the prospects for that happening soon look dim. Analysts are now scratching Arcoxia from their forecasts.

A top FDA official told Dow Jones Newswires Thursday it will now require longer-term studies for similar drugs pending agency approval. The agency didn’t say whether it would delay its review of Arcoxia.

Then there is the question of the company’s leadership.

During a press conference Thursday morning, Gilmartin, chairman and chief executive, made it clear he won’t exit early in response to the Vioxx withdrawal. “I don’t intend to resign,” he said.

But company rules require Gilmartin to retire in 2006 when he turns 65, coincidentally the same year the Zocor patent expires. The company doggedly says it will replace him from within, but many have questioned whether any existing executives are right for the job.

“I don’t think they have anyone to go with,” said Anne Underhill, head of Baring Asset Management’s Healthcare Global sector team.

Gilmartin himself was one of the first CEOs Merck tapped from an outside company – medical-device maker Becton Dickinson (BDX).

Rumors have circulated that Merck might be interested in buying its cholesterol-drug marketing partner Schering-Plough Corp. (SGP), which would allow Fred Hassan, Schering’s respected chief executive, eventually to take over for Gilmartin.

Merck maintains it is against major mergers and Schering-Plough said it doesn’t comment on rumors or speculation.

The enormous decline in Merck’s share price Thursday has thrown water on speculation the company could be out to acquire a competitor.

With the withdrawal alone, the company’s earnings will suffer severely. Merck said its 2004 per-share earnings estimate of $3.11 to $3.17 would be reduced by 50 cents to 60 cents a share as a result of the Vioxx withdrawal.

Wall Street is waiting to see exactly what cost cuts Merck puts in place. At the press conference, Gilmartin said the company wouldn’t be hiring new sales staff to push potential products, but rather will move around the ones it has. But he did speculate that there will be people leaving the company.

Merck also said it will maintain its dividend.

Goldman Sachs analyst James Kelly thinks the dividend is safe, but that the payout ratio could spike to 70% by 2007.

Many also expect the company to take a large reserve to protect itself from litigation stemming from the withdrawal.

Because the side-effect issue has been known for years, there are already hundreds of people suing Merck for damages. Merck had played down the cardiac risks of the drug, but now that it has been withdrawn and a major, respected study showed a risk, the litigation floodgates are expected to open.

The company and analysts have yet to estimate the possible damages.

“There’s just no way of knowing what the risk of legal liability there is here,” Underhill said.

The threat of massive litigation also may also keep Merck off the auction block itself. Bayer, despite shopping itself around for years, never got much interest because of the suits it faced after withdrawing Baycol.

Ryan’s firm, Deutsche Bank, owns 1% or more of Merck’s shares and has been an underwriter of a Merck public offering in the last five years.

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