Vioxx Gives Merck Some Pain

Last Thursday Merck (MRK) announced that it was pulling its Vioxx drug from the market. Mr. Market was not at all happy with this development and dropped Merck’s market value by 27 percent. This was an eight year low for Merck’s market value.

Merck was proactive in informing the FDA of its research concerning the increased risk for cardiac problems associated with Vioxx. I believe Merck made the right decisions in voluntarily removing Vioxx from the market even though it will cost the company in the short term. I believe the market has over reacted to this setback, and I don’t believe the loss of Vioxx will impact the long term value of Merck. I agree with Barron’s assessment this weekend that investors have clearly overreacted. Vioxx only accounted for 11 percent of the company’s sales this year, so a 27 percent hit that Merck’s shares took is a bit excessive.

However, there is some danger that lawsuits will cut into future earnings. However, given Merck’s proactive measures and the fact that it had earlier put a warning label on Vioxx warning of cardiac risk, I think Merck will be able to manage the lawsuits. There is also the issue that Merck’s drug pipeline seems rather thin. I think the struggles that Merck has faced this year will cause the company to focus on new product development and strategic partnerships.

Looking at Merck’s free cash flow, I find that using fairly conservative estimates that Merck shares have an intrinsic value between $40 and $50. Given Merck’s 4.6 percent dividend that should be safe for quite some time, I am interested in buying Merck at this time with all of its warts and bruises. I will patiently await better days and new drug discoveries in the future while collecting a handsome dividend now.

I’m adding Merck to my Marketocracy fund Monday morning, so we can track the performance of this analysis.

8 thoughts on “Vioxx Gives Merck Some Pain

  • October 6, 2004 at 2:34 am

    I have to completly disagree with your Merck analysis. first of all if Kerry wins, you can forget about this stock going anywhere. Kerry has been gaining in polls and I do believe this country wants a change in the oval office. Second, nobody knows what the litigation risk to Merck truely will be. My guess is that with enough deaths it could bankrupt this company. Third, the problem with that Barron’s article is that guy who was being quoted had a big position in Merck. What do you think he is going to say? Fourth, the warning label I think could be what hurts this company. The fact they knew and may have been lazy about there testing could hurt them huge with the tort bar. Also, there was an article in the New England Journal Of Medicine that talked about these exact problems a few years ago. I will give you one more. Canada! The importation of drugs from Canada is inevitable. Merck is a $25 stock waiting to happen.

  • October 6, 2004 at 9:26 pm

    Roberto, thank you for sharing your opinion regarding my Merck analysis. However, I think many of your points are a bit short sighted.

    First, it is very unlikely that the election of Kerry will drive the future price of Merck. The President has very little power to impact a particular industry. Congress is the real power for creating laws in DC.

    Second, while know one knows the exact litigation risk to Merck, there are ways to bound the problem. I think it is very unlikely that the total litigation risk is greater than $1 billion. It is truely amazing the amount of cash that a company like Merck generates. The litigation will hurt the bottom line for a few years, but it will not be a long term cost to the company.

    Finally, I really don’t think drug imports from Canada will impact Merck in the long run. Sooner or later drug companies will start to put the squeeze on the supply of drugs to Canada if the importation of drugs into the U.S. continues to grow.

    You might be right that Mr. Market will panic and drive Merck down to $25. I’ll be happy to buy more at that price, but three years or more from now there is a real good probability that Merck will be climbing back to it’s former highs.

  • October 7, 2004 at 2:38 am

    There is an old saying on wall street, never catch a falling kneife. More news keeps coming out that is only going to drive Merck out of business. Today there were press releases that stated Merck could have anywhere from 30,000 to 100,000 heart attack lawsuits. Oh and you can bet that the market will factor in a Kerry win which everyone on the street knows will just kill the drug stocks. Also, Merck has one of the worst pipelines around. I also don’t care how much cash they generate, cuase that cash will be soon in the hands of laywers. The facts are that Merck spent 100’s of millions on advertising Voixx, yet ignored the warnings of many doctors about the risks of this drug for years! This stock is far from being done going down, and as I stated yesterday it could go out of business. Stay tuned!

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  • October 16, 2006 at 2:28 am

    … Only thing that i know is ” I just bought & bought when Merck downed to $27. An d bought it up again when the prices down. So, if you are value investor, you probably wont miss this chance.

    … I’m absoluetly one of the buffettology. Now, i’m enjoying Merck at $42 and 5% dividend yield. SWEET !!!!


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