Merck’s Lower Numbers

Merck (MRK) must be taking Vytorin. The company’s financial numbers dropped to a fourth quarter net loss of $1.63 billion (75 cents/share), the result of litigation and government investigations.

Merck probably thought it would be reaching the light at the end of the tunnel after spending $4.85B to settle claims for its painkiller Vioxx. Merck withdrew Vioxx worldwide on September 30, 2004 – the day transiting Saturn (loss) conjoined the Merck stock chart Ascendant (public’s impression of Merck). Despite Vioxx’s withdrawl from the market due to increasing the risk of heart attack and stroke, Merck has been successful at making the case that plaintiffs already had these risk factors in place.

But Vioxx may be just the prelude to a much more serious future of litigation and government investigation for Merck, building upon the case that Merck may be engaging in a pattern of deception about its products.

Merck began its descent from being a darling of the DOW after it released its long-delayed Enhance study on cholesterol drug Vytorin. (Vytorin is a combination of Schering Plough’s Zetia and Merck’s Zocor.) The Enhance study found Vytorin to have no medical benefits. In fact, plaque actually grew faster in Vytorin patients than those taking Zetia alone.

During yesterday’s earnings call, Merck vigorously defended Vytorin, which had combined global sales of $5.2B in 2007. Vytorin is now the subject of Congressional inquiries, investigations by the Attorney Generals of Connecticut and New York, as well as 50 class action lawsuits over its marketing. Merck said they won’t back off from promoting Vytorin, and that their sales reps continue to market the message that Vytorin is “very safe” and has “proven clinically able to lower bad cholesterol”. “We won’t back off; this is so important from a health management standpoint.” I think Merck thinks they can dodge the legal bullet on Vytorin since Merck applied to the FDA to approve Vytorin for its ability to lower LDL (“bad”) cholesterol. In short, you could develop all kinds of adverse effects taking Vytorin, but it does its job in lowering cholesterol.

Merck said that Fosamax, its bone-strengthening drug, posted a “significant sales decline.” Fosamax goes off patent in February, followed by Fosamax Plus D in April. According to the Wall Street Journal, “Merck has set aside $48 million in Fosamax litigation reserves for about 340 cases filed as of Sept. 30.” The claims by plaintiffs range from Fosamax causing the bone wasting condition ONJ (osteonecrosis of the jaw), to causing stress fractures due to the toxicity of Fosamax. The Journal article points out that Fosamax “belongs to a category known as bisphosphonates – it stays in the body for 10 years.” In fact, the FDA “in response to physician reports, on Jan. 7 issued an alert flagging the possibility of severe and sometimes incapacitating bone, joint, and/or muscle [musculoskeletal] pain in patients taking bisphosphonates. The pain may occur within days, months, or years of use.”

What makes Fosamax litigation cases different than Vioxx cases is that ONJ is known as a “signature injury” – it is easier to trace the cause of the injury back to a drug. The Journal cites a study in the Journal of Rheumatology that people “taking oral bisphosphonates have nearly three times the risk of developing osteonecrosis compared with those not taking them.” The first Fosamax ONJ cases are expected to go to federal court in late 2008 to early 2009.

Gardasil is the first vaccine the FDA approved “that may help guard against diseases that are caused by human papillomavirus (HPV) Types 6, 11, 16, and 18 for females aged 9 to 26”, according to Merck’s website. Since there are more than 100 types of HPV, being vaccinated with Gardasil does not protect against all types of cervical cancer and genital warts. Women still need to visit their doctor for regular cancer screenings/exams.

Gardasil sales fell to $339M in Q4 from $418M in Q3. Merck took a cue from retailers and cited “seasonality” as the reason. Merck said vaccines of school age girls fall mostly in the second and third quarters. No analyst questioned Merck about the females beyond school age, or that Gardasil is comprised of three injections to be taken over six months. Merck has applied to the FDA to expand Gardasil for women 27-45 and expects the FDA to reach a decision later this year.

In the meantime, Merck said it will make efforts to “improve compliance for getting the second and third shots.” Reports are steadily growing of girls fainting and in such pain after the injection that they refuse further shots. There have been a few reports of girls dying shortly after taking Gardasil, but it has not been conclusively proven that the vaccine was the cause.

Merck had been aggressively lobbying state legislatures to get Gardasil added to the list of required vaccines for schoolgirls. A mandatory requirement was defeated in Texas, and Virginia has pushed back its mandate to later in 2010. (The “mandate” actually has a parental opt-out clause.) If Gardasil became a required vaccine, it would then get on the Federal vaccine liability program, making it nearly impossible to file a lawsuit against any adverse effects caused by Gardasil.

Gardasil was approved by the FDA on June 8, 2006. Astrologically, I think there’s a possibility that in addition to the adverse effects already reported, Gardasil may be found to cause harmful effects to a women’s fertility and reproductive system.

Despite their limited growth prospects, analysts continue to recommend big pharma stocks. But big pharma’s budget is eaten up by big marketing and probably bigger litigation – leaving little room for innovation.

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