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Merck stock plummets on news of Vioxx recall

By Brooke A. Masters
The Washington Post

KATHY WILLENS / AP Dr. Peter Kim, president of Merck's Research Laboratories, left, and Raymond Gilmartin, Merck's CEO, leave a news conference announcing Merck's voluntary withdrawal of the arthritis-pain drug Vioxx.

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Related stories Merck pulling Vioxx over stroke, heart risk

Merck announced it was withdrawing Vioxx, which had $2.5 billion in worldwide sales last year, because of studies that found that the drug increases the risk of heart attack and strokes after 18 months of continuous use. Merck shares fell $12.07 to $33.00, erasing more than $26 billion in market value.

Merck is one of the nation's mostly widely held stocks, particularly by mutual funds, and the announcement dragged the market indexes down with it. The Dow Jones industrial average and the Standard & Poor's 500-stock index both closed slightly lower but would have been up for the day if not for Merck. The Nasdaq composite index ended the day only slightly higher.

Merck rival Pfizer, which makes competing medications Celebrex and Bextra, closed at $30.60, up 42 cents.

The recall is likely to cut Merck's fourth-quarter sales by more than $700 million and shave 50 to 60 cents off Merck's earnings per share for the year, according to Chief Financial Officer Judy Lewent. The company had predicted earnings of $3.11 to $3.17 per share. Vioxx, which Merck sells for about $2.70 for a 25-milligram daily dose, is one of a class of painkillers known as Cox-2 inhibitors. It was the firm's fourth-biggest seller last quarter, said Merck spokesman Tony Plohoros.

Merck was already facing serious concerns. The patent on Zocor, the cholesterol-reducing drug that is Merck's top seller, expires in 2006 and a recent study called into question the drug's benefit for patients who have had heart attacks.

"The action could not have come at a worse time," Morgan Stanley analysts wrote in a report yesterday. But they noted that the firm's shares are trading at less than 13 times earnings, lower than some of its competitors. "The sell-off may be overdone," they wrote.

Merck has a new arthritis pain killer in the works, Arcoxia, which was submitted to the Food and Drug Administration (FDA) at the end of 2003, and analysts have high hopes for Zetia, a cholesterol-absorption inhibitor that was developed in a joint venture with Schering-Plough.

Falling stock watch Following is a list of other Dow stocks that have plunged in recent years, according Markets Data group, which said Merck's drop was the fourth-largest since 1993: March 2000: Procter & Gamble tanked 31 percent after the company said earnings wouldn't meet analysts' expectations. October 2000: Home Depot slumped 28 percent after it said a fall in price in many of its products would lead earnings to come in below expectations. September 2001: United Technologies fell 28 percent after the aerospace company said the attacks of Sept. 11, 2001, would cut into operating income. June 2002: Intel plunged 18 percent after issuing a profit warning to investors that sliced away $33.6 billion in value. Sources: Markets Data Group and Reuters

Some analysts said yesterday that the study that prompted Vioxx's recall may slow the approval of Arcoxia, which is a similar drug, and they are concerned about potential lawsuits from patients.

"The litigation risk is real," said Goldman Sachs analyst James Kelly. "We believe that Merck has taken rigorous, appropriate steps in the last week given this data. The battle will be fought on whether the earlier clinical trials should have driven Merck to a decision earlier."

In the largest previous pharmaceutical recall, Bayer paid more than $1 billion to settle nearly 3,000 lawsuits stemming from its 2001 decision to take the cholesterol drug Baycol off the market. Wyeth has set aside $16.6 billion to deal with product-liability claims stemming from its diet drugs, popularly known as fen-phen.

"While Merck shares appear cheap, we see no reason to bottom fish here. In our view there are no meaningful catalysts in the near term, and there are still many significant hurdles for Merck," First Albany Capital analyst Adam Greene wrote in a report published after the announcement.

The Vioxx announcement also sparked scrutiny of an unusual spike in Merck options Wednesday. The overall volume of Merck options — contracts that give the buyer the right to buy or sell shares at a certain price at a certain date in the future — was 10,125, slightly below this year's average of 12,000 contracts a day, said Pam Tvrdy, spokeswoman for the Options Clearing.

But, 2,900 of the options that changed hands Wednesday were "puts," allowing the owners to sell Merck shares at $42.50 on Oct. 16, more than 22 times the average daily volume for that type of contract, according to Bloomberg. The price of that contract rose from 10 cents Wednesday to more than $10 after the Vioxx announcement.

A spokesman for the Chicago Board Options Exchange said the exchange's department of market regulation reviews all unusual trading but does not comment on particular investigations. The Securities and Exchange Commission also investigates when there are unusual patterns in stock or options trading.

Nastech files with SEC

to raise $80 million

Nastech Pharmaceutical filed yesterday with the Securities and Exchange Commission to raise up to $80 million from investors.

The Bothell biotech company grabbed investors' attention earlier in the week, when it signed a deal with pharmaceutical giant Merck to co-develop a nasal spray against obesity. Nastech's stock shot up 70 percent the day of the news.

Yesterday, Nastech's stock continued climbing, another 15 percent to $14.29 per share. That gain came the same day Merck yanked its hit arthritis drug, Vioxx, from the market, fueling speculation it will soon need to create or acquire another blockbuster.

If Nastech raises the maximum amount, it would be the company's largest financing ever. The company had $26 million in cash and investments at the end of June.

— Seattle Times business reporter Luke Timmerman

Copyright © 2004 The Seattle Times Company

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