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.