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Merck should survive the bitter pill of Vioxx


Dear Mr. Berko:

What is your opinion of Merck now that it has problems with Vioxx? In early 2001, Merck was trading over $90; now that it’s at $32.20 with a 4.7 percent dividend, I think the stock is a quality value play. I know that Philip Morris survived even worse claims and went on to make new high stock prices. So did R.J. Reynolds.

I’m a semiretired pharmacist and know that Merck has a number of well-prescribed drugs on our shelves and that the company is respected by physicians and its competition. I also think the Vioxx thing is overstated and that the money-grubbing lawyers are making more out of this than there really is. What do you think about buying 200 shares of the stock?

F.E., Des Moines

Dear F.E.:

Between 1999 and 2003, a total of 27,648 Vioxx users purportedly died of heart disease, or some 5,229 people each year. In 2003, 3.2 million people filled their Vioxx prescriptions, so 3,194,771 (3.2 million less 27,648) people used Vioxx safely. This means that 99.835 percent of Vioxx users took those little pills without reporting a problem while 0.165 percent of those who took Vioxx supposedly died of heart disease each year.

According to the federal Centers for Disease Control and Prevention, some 1 million people die of heart disease each year, and the causes are lifestyle, heredity, recreational drug use, hypertension, high cholesterol, emotional stress, high-fat diets, diabetes or just the old fickle finger of fate. Now, if some of those souls were daily Vioxx users for more than 18 months – there’s no risk if users took Vioxx for less than 18 months — and kicked the can, how is it possible for a cheap suit to prove “specific cause” and with absolute certainty eliminate all other potentially contributing factors for each of the 27,648 users who died of heart disease between 1999 and 2003?

What about Vioxx users who have taken the drug for three years and remain healthy and active? How will the cheap suits determine “specific cause” when users who took 12.5 milligrams of Vioxx for 18 months or longer died, while others who took 25 or 50 milligrams for the same period or longer are still playing tennis or golf?

I believe the necessary proof will be elusive. With a 99.835 percent safety record, I don’t think Merck & Co. Inc. (MRK-$32.20) should have taken Vioxx off the market. Please do not sell the company short, because it still has tremendous clout and (in about two years) a potentially profitable future.

MRK has the highest operating margins (38 percent) among the big pill-pushers and more than $13 billion in short-term investments and cash, which exceeds $6 a share. MRK’s pipeline is dry as a bowl of Cheerios and may not commence its new product output till 2007. But when it does, and I think it will, that pipeline may be among the most fecund in the industry.

The company expects to file a new drug application with the Food and Drug Administration for three viral vaccines, one of which seems to prevent cervical cancer. About the same time, Merck expects to seek approval to market two new drugs that treat type 2 diabetes and a sleep medication called Gaboxadol that may give the competition some sleepless nights.

Meanwhile, Merck’s joint venture with Schering-Plough Corp. has produced two new cholesterol-lowering drugs: Zetia and Vytorin. Revenues from these prescriptives have far exceeded expectations and could surpass $1.5 billion over the next 12 months. Merck’s Emend (approved in 2003) is a new approach to treating chemotherapy-induced nausea. More than 10 million cancer patients who undergo chemotherapy each year experience nausea, and Emend has had remarkable results.

MRK’s other attractions are its ridiculously low price-earnings ratio, its superb balance sheet and a dividend that yields 4.7 percent. This dividend is supported by an enormous cash flow ($3.25 a share), the company’s strong financial position and management’s commitment to maintain that dividend.

Vioxx will take about 50 cents a share from MRK’s earnings, dropping them to about $2.60 a share for 2004 and 2005 with a small recovery to perhaps $2.80 in 2006. I suppose cost-cutting measures will be implemented and greater resources may be assigned to other products. But Wall Street still expects that MRK’s operating margin and net profit margin will remain at an impressive 39 percent and 26 percent, respectively.

MRK trades at 10.6 times earnings, and in my 43 years as a money manager, I don’t ever recall the stock trading so cheaply. I would be comfortable owning 200 shares of MRK at $32.20. I think by 2008 this stock could trade at $46-$49.

I recently bought shares of Merck for my personal account and for many of our managed accounts, too.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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