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Merck Tosses Another PR Problem On The Pile

Posted: Apr 02, 2008 14:46 PM by Glenn Curtis

Tickers in this Article: MRK, SGP

After three years of slugging it out with lawyers over Vioxx the last thing drug company Merck (NYSE:MRK) needed was another public relations crisis. But unfortunately for shareholders that appears to be exactly what Merck has on its hands.

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This past week numerous web and print publications ran stories talking about a study that showed Merck's $5.2 billion cholesterol-drug Vytorin, was no more effective in dealing with heart disease than another one of its products, Zocor, which is available in generic form.

Goodwill Walks Right Out The Door
Following the Vioxx debacle, Merck had done a terrific job rebuilding its reputation over the past year or so. CEO Richard Clark made the rounds, telling the company's story to any media outlet that would listen. Merck had also been boasting about its beefy R&D pipeline. These efforts appeared to have worked. The stock managed to trade north of $60, a level it hadn't seen in a few years. And over over the last half year or so Wall Street analysts warmed to the story posting a series of high-profile upgrades.

This goodwill was all but wiped out by the Vytorin study coupled with news reports that suggest that Congress may be looking into whether Merck and/or its Vytorin co-developer Schering-Plough (NYSE:SGP) withheld information on the drug. What analysts who follow the company supposed to think now?

The sad part is I don't think it matters whether Merck is ultimately found to have withheld data. The damage has already been done. (For more on the effects of a little bad press, check out Buy, Sell or Hold?)

Ring Up the Lawyers
Regardless of how this debacle shakes out, I think it's only a matter of time before we see a shareholder lawsuit against Merck and/or Schering-Plough because of the news and the stock drop. The stock is down about 37% from its annual high of $61.62. There are probably lots of unhappy campers out there, and all it takes is one or two to wreak havoc.

Even if the company is vindicated, defense costs are a massive concern. I'm playing devil's advocate here, and perhaps the dust could settle with no cost, but if the lawsuits come Merck will be forced to take reserves, as it did with Vioxx, in order to defend itself against shareholder lawsuits. This scenario is likely to hurt future earnings and cause the stock to drop farther.

Bottom Line
While I love Merck, and over the long run think it'll fare just fine, the news about Vytorin puts a damper on much of the goodwill it worked so hard to build up. It also may be just the beginning of the bad news if the lawyers start sinking their claws into the company. This means now might not be the best time to buy.

For more on analyzing pharmaceutical stocks, check out Measuring The Medicine Makers and Buying Into R&D.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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