Subscribe to BusinessWeek

Investors hoping for reassurance from Merck (MRK) execs in light of recent problems got little besides generalities at the Dec. 14 meeting at the company's Whitehouse Station, N.J., headquarters. Chairman and CEO Raymond Gilmartin took the stage and said the drugmaker was prepared to deal with the fallout from the withdrawal earlier this year of its painkiller Vioxx. And company executives outlined the drugmaker's new-product pipeline, as well as ongoing efforts to cut costs. "We're not operating under 'business as usual' [guidelines] in any sense," Gilmartin told his audience.
But analysts and investors didn't get answers to the most pressing questions. There was no update, for example, on the ongoing search for a successor to the 63-year-old Gilmartin, who is scheduled to retire in 2006. Nor did Gilmartin provide any guidance on what Merck's Vioxx-related legal bills might end up costing the outfit. "That liability is the thing that will drive the stock over the next few years," says Sanford Bernstein analyst Richard Evans, who figures the tab could run as high as $38 billion.
Kenneth Frazier, Merck's general counsel, said 475 lawsuits have been filed alleging injury from Vioxx. Then there are the ongoing inquiries being conducted by Congressional committees and the Justice Dept. into Merck's handling of the drug's withdrawal.
FRAIL PIPELINE. Frazier contended Merck will fight each Vioxx lawsuit individually and oppose any certification of a big class action. But when it came to questions about how much Merck might need to set aside for settling those cases, Frazier said, "We can't reasonably estimate [the liability] now."
While the ultimate cost of Vioxx remains a mystery, the briefing left no doubt about Merck's scramble to fill its pipeline. Over the recent years it has been hunting for acquisition and product-licensing deals. In 1999, Gilmartin noted, Merck did just 10 licensing deals. That figure soared to 50 transactions in 2004. Among the products gained through such deals and now in development: an insomnia drug called Gaboxadol, a treatment for stroke, and a new medicine for depression.
Still, the pipeline is alarmingly thin. In the next few years, Merck has several vaccines that may be hitting the market, including a vaccine for the human papillomavirus (HPV), the leading cause of cervical cancer. But vaccines aren't as profitable as traditional drugs, because they're usually administered only once, as opposed to drugs for chronic conditions, such as high cholesterol, which are typically taken for years, even decades.
MARGINAL SAVINGS. So while analysts expect that the HPV vaccine could ultimately generate sales of more than $1 billion, that's a fraction of the $5 billion in sales for Merck's cholesterol-lowering drug Zocor, which will face widespread generic competition in 2006. And while an upcoming diabetes drug may see sales that ultimately top $1 billion, Merck will be sharing the sales from that product with partner Bristol-Myers Squibb (BMY).
Merck's expected financial squeeze in the years ahead is prompting aggressive cost-trimming. It will have eliminated 5,100 jobs by yearend, which should save $300 million in 2005. Similarly, the outfit is cutting capital spending and looking for savings in its purchasing operations.
Such strategies may help on the margin, but earnings still stand to take a hit from lost Vioxx revenues and the generic erosion of Zocor. And then there's the potential for another earnings drain if Merck starts to reserve for its Vioxx liability. The timing and size of that impact were of the many questions left hanging in Whitehouse Station.