Merck's Valueline Outlook

Merck’s March-period results were mixed. Sales were below our expectations, but share net beat our estimate. That said, earnings per share were aided by a low tax rate caused by foreign tax credits and by share buybacks.

The FDA has rejected cholesterol drug Cordaptive. By issuing a ‘‘nonapprovable’’ letter, the agency has damped hopes that the drug, which had been one of the most promising in Merck’s development pipeline, would help offset the 2012-2013 patent expiration of Singulair. Merck and the FDA would not comment on why Cordaptive was turned down, and Merck plans to submit additional data that it believes will increase the odds of
approval. Still, the setback has raised doubts about the quality of the pipeline as well as the scientists’ ability to develop new drugs. Too, the news follows the release of data earlier this year that showed that another cholesterol drug, Vytorin, failed to slow heart disease better than a less expensive drug.

Courts have overturned two Vioxx verdicts. An appeals court in Texas found
that the plaintiffs had not proven that the drug had been the cause of death, and a New Jersey court reduced a verdict, saying that Merck had not committed consumer fraud. Although the rulings may discourage lawyers from pursuing similar lawsuits, Merck has already offered to pay
almost $5 billion in an attempt to end the litigation. The settlement covers about 50,000 people that allege heart attacks or strokes after taking Vioxx, and will result in average payments of $100,000 for dropping their lawsuit. Although it now appears that Merck’s initial strategy of fighting every case may have been warranted, we believe management did the right thing in getting the matter behind it.

The company is downsizing its U.S. salesforce. Plans to cut about 1,200 sales positions, or about 15% of the total, reflect competition from generic drugs, declining
reinsurance reimbursements, and the above-noted new-drug setbacks. Too, it is part of the plan to cut costs. We are neutral on these shares. Although management recently reiterated its
earnings guidance, the recent product approval setbacks are dissapointing.
Douglas G. Maurer, CFA July 18, 2008


2011-13 PROJECTIONS
-------------------------------------------------------------Ann’l Total
--------------------------Price----------- Gain--------------- Return
High----------------------85--------------(+130%)------------25%
Low----------------------55--------------(+50%) -------------14%