Risk & Compliance

Bitter Medicine for Merck

SEC investigates; Moody's lowers long-term debt rating; appeals court invalidates patent.
Stephen TaubFebruary 1, 2005

Already ill after the withdrawal of blockbuster arthritis drug Vioxx, Merck & Co. Inc. now has a few more reasons to feel even sicker.

The beleaguered drug giant announced that the Securities and Exchange Commission has issued a formal notice of investigation relating to Vioxx, its link to increased risk of heart attack, and how and when the drug was removed from the market.

Last week, Moody’s Investors Service also lowered the long-term ratings of Merck senior unsecured debt to Aa3 from Aa2, concluding a rating review initiated in November. Moody’s, which also confirmed Merck’s Prime-1 short-term debt rating, added that the rating outlook is negative.

According to the ratings service, the downgrade primarily reflects the concern that free cash flow is likely to erode over the next several years in the face of potentially high legal exposures related to Vioxx. Moody’s limited the downgrade to one notch because Merck is currently carrying $14.2 billion of cash and fixed-income investments compared with $2.2 billion of short-term debt, and because the ratings service believes it unlikely that Merck’s Vioxx-related cash outflows will exceed $10 billion over the next three years.

The Moody’s assessment, however, came before Merck suffered yet another blow last week.

A federal appeals court invalidated Merck’s patent for its second-biggest product, the osteoporosis pill Fosamax, according to The Wall Street Journal. This means that Israeli-based generic-drug maker Teva Pharmaceutical Industries Ltd. can market the weekly version of the drug — which accounted for about 90 percent of the $3.2 billion in Fosamax revenues last year — in February 2008, one decade earlier than Merck had anticipated.

Meanwhile, in 2006 Merck stands to lose U.S. patent protection on its top-seller, the cholesterol-lowering drug Zocor, the paper pointed out.

Merck’s mounting woes could lead to what seemed unthinkable as recently as a year ago — a merger with another drug company. Possible candidates include Schering-Plough Corp. and AstraZeneca PLC.