Merck's magic act loses dazzle

By Ransdell Pierson - Analysis

NEW YORK (Reuters) - The glory is quickly fading for drugmaker Merck & Co, which dazzled investors over the past three years by recovering from a crisis over its Vioxx painkiller and rolling out blockbuster products.

For now the stock is looking more like a valuation play than a bet on its fundamental business outlook.

Much of the luster came off on Monday, when it was announced that the company's Vytorin cholesterol fighter had failed to successfully treat patients with heart valve damage.

What's more, patients taking Vytorin developed cancer at a greater rate than those taking placebos, even though experts said that was probably due to chance.

To further dismay investors, second-quarter earnings not only showed a marked slowdown in sales growth for its Gardasil vaccine against cervical cancer but also a decline in sales of asthma drug Singulair, usually a dependable earner.

Merck's refusal to reaffirm its previous 2008 earnings forecast, citing new uncertainty about Vytorin's sales outlook, was the final straw for many investors.

"This is hard to believe," Sanford Bernstein analyst Tim Anderson said in a research note, saying Merck's real reason for holding back may have been lower than expected sales of big products such as Singulair and Gardasil.

Shaken investors have bailed. Merck shares fell 6.2 percent on Monday and dropped another 11 percent on Tuesday to a 30-month low as other industry analysts also cut their earnings forecasts, citing similar concerns about growth prospects.

"We can no longer recommend putting new money to work in Merck," said Leerink Swann analyst Seamus Fernandez, who noted that Merck slashed full-year sales forecasts for Gardasil by $500 million and cut its Singulair forecast by $200 million.

Fernandez now expects Merck to post average annual earnings growth of 4 percent between 2007 and 2012, down from his earlier forecast of 6 percent.

BUY SIGNAL?

Vytorin has been on the downswing since January, when it proved no better than a generic cholesterol fighter at cutting plaque in neck arteries.

Sales of pricey Vytorin have been hurt by intense media coverage questioning its value, despite its ability to slash levels of "bad" LDL cholesterol by as much as 60 percent.

Vytorin and another cholesterol drug, Zetia, also sold with Schering-Plough Corp, helped Merck regain its footing after it recalled Vioxx, its $2.5 billion-a-year arthritis drug, in September 2004 due to safety concerns.

All this has put CEO Richard Clark back in the hot seat.