Steep charges bite into Merck profit

The company puts nearly $1 billion into a legal reserve to settle a government probe into Vioxx.

By Kim Peterson Oct 29, 2010 1:33PM
Cost of prescription drugs © CorbisAs Halloween approaches, Merck (MRK) revealed that it continues to be haunted by Vioxx.

The pharmaceutical giant saw its third-quarter profit drop 90%, partly due to lingering legal costs related to the former pain drug. Investors were not happy with the news, and shares fell 2% Friday in response.

Merck took out $950 million in the quarter for its legal reserve, expecting to use that money to resolve a government investigation into Vioxx, the controversial painkiller Merck withdrew in 2004.

The legal costs and other one-time charges cut Merck's profit to $342 million, or 11 cents a share. That's down from $3.4 billion, or $1.61 a share, in the year-ago period.

But Merck, which makes the diabetes drug Januvia and the asthma drug Singulair, still managed to beat Street expectations. Excluding one-time charges and gains in both quarters, Merck's profit came to 85 cents a share, down from 90 cents a year earlier. That was better than the 82 cents per share that analysts wanted to see.

Merck disappointed on the revenue side, however, with $11.1 billion for the quarter. That was an 84% increase, mostly due to the November 2009 acquisition of Schering-Plough. Analysts were expecting revenue of $11.2 billion.

Schering-Plough also affected EPS because of the stock float Merck took in the acquisition, MarketWatch reports. A year ago, Merck had 2.1 billion outstanding shares, but in this year's quarter that ballooned to 3.1 billion. Post continues after video:
Merck was hit with a rash of lawsuits after researchers linked Vioxx to a higher rate of heart attacks and strokes. About 2 million Americans were taking the drug when Merck withdrew it, USA Today reported.

Merck has already paid $4.85 billion to settle those lawsuits and $1.9 billion in legal costs. Hopefully, after resolving the current investigation by U.S. prosecutors, Merck can finally close the book on Vioxx.

Analysts were pleased with the quarter, with one, from Leerink Swann & Co., saying the legal charge "overshadows solid product performance," according to Bloomberg. "We'd be buyers on any significant weakness today from the $950 million legal reserve related to Vioxx," the analyst added.

Merck was confident enough in the results to raise the lower end of its full-year profit forecast. Now it expects EPS at between $3.31 and $3.39. Analysts expect $3.36 a share.

"I'm extremely pleased and proud of what we've achieved in such a short time," chief executive Richard Clark said in the quarterly earnings call, according to The Associated Press.

Oct 29, 2010 5:30PM

Merck was handling the Vioxx problem on a case by case basis. The matter was being settled by the courts. The government comes along and Merck has to set aside A billion dollars. That billion might have led to a cure for several of the scourges that plague mankind. Government doesn't want the human condition improved. They just want control. 

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