Merck Posts Q4 Loss on Vioxx Settlement, as New Challenges Loom Ahead

Merck Reports Encouraging 2007 Results Despite Q4 Net Loss

Merck & Co. ended 2007 on a strong note despite a US$1.631-billion loss in the fourth quarter. The loss was due to a US$4.850-billion charge related to a recent agreement to settle litigation over Vioxx's side effects. The settlement itself is a highly positive development for the company, and given the cost of continued litigation the settlement charges appear more than acceptable.

In 2007, the company's worldwide sales increased by 7% year-on-year (y/y) for the full year, while sales in the last quarter were up by 3% y/y. Annual sales were boosted by a two-percentage-point favourable currency effect, while fourth-quarter sales gained four percentage points due to currency fluctuations.

In the fourth quarter and full-year 2007, the company spent US$118 million and US$483 million, respectively, on its global restructuring programme. It also incurred US$325 million research expenses related to the acquisition of NovaCardia (U.S.).

New Products, Vaccines Boost Sales

The transformation in Merck's portfolio has continued in 2007 as several products that recently entered the market garnered significant sales. Key among those was allergic rhinitis drug Singulair, whose fourth-quarter sales increased by 20%. New vaccines made a strong contribution as well, with Gardasil reaching US$1.5 billion in annual sales. New chicken pox vaccine Varivax (not listed separately in the table below) earned US$270 million in the fourth quarter and US$855 million for the full year. New HIV drug Isentress (raltegravir) also made a strong entrance with fourth-quarter sales of US$29 million and full-year sales of US$41 million.

The JV with Schering-Plough also remained a strong contributor to growth in 2007. Sales of the two products sold by the JV (Vytorin [ezetimibe/simvastatin] and Zetia [ezetimibe]) increased by 34% y/y in both the fourth quarter and full-year 2007. Merck, which records the sales contribution from the JV as equity, recorded equity income from the JV of US$538 million in the fourth quarter and US$1.8 billion for the full year.

Outlook and Implications

Although there is no doubt that Merck has emerged from a difficult year with better-than-expected results, the company is not free from challenges looking ahead. In 2008, Merck faces the patent expiry of its lucrative Fosamax franchise. Fosamax loses U.S. patent protection in February 2008 and Fosamax D in April 2008. As a result, the company expects a significant decline in sales of these two products in the U.S. market. To add to Merck's Fosamax challenges, the company is also facing a number of lawsuits from patients alleging they developed osteonecrosis of the jaw (ONJ) following use of the osteoporosis drug. While the company disputes the link, there have been some studies indicating that use of bisphosphonates (the class that Fosamax belongs to) could increase risks. The U.S. FDA issued a warning to physicians on 7 January about the potential risk. Earlier this week, the first lawsuit was filed in the United States related to a non-jaw injury. All of these factors considered, Global Insight expects Fosamax litigation to emerge as a serious setback for the company over the coming months. The impact of the litigation could be wider than initially expected as more non-jaw injury cases are filed. In addition, ONJ by its nature makes the link to a drug effect easier to establish in comparison with proving cardiovascular risks attributable to a single drug. The litigation reserve of US$48 million that Merck has set aside for Fosamax may well prove to be insufficient.

Separately, the highly lucrative Vytorin/Zetia franchise is due to face significant pressures in 2008 due to the belated release of ENHANCE trial results, which have cast doubt over Vytorin's efficacy compared with off-patent simvastatin. There are initial indications that sales of both Vytorin and Zetia are falling in the immediate aftermath of the study release. To what extent this decline can be controlled and reversed would depend on the efficacy of Merck and Schering-Plough's outreach to doctors and the outcome of the FDA's review of the drugs.