With that announcement Thursday, drug giant Merck ended the life of a pain-relief drug that was part of the most successful product launch in history when it hit the market in 1999.
Now the drug may be celebrated for other things: plunging Merck’s share price to its lowest since 1996 and possibly opening the way to a flurry of lawsuits.
By withdrawing the drug from the worldwide market immediately, Merck is expected to take at least a $2.5 billion blow to revenue this year, or more than 10% of total expected sales.
What may be more important, though, is that Merck, for the first time, has acknowledged that there is definitive evidence that the drug raises the risk of heart attacks and strokes in those who take it over long periods.
Several earlier, but less exhaustive, studies had come to a similar conclusion, but Merck had disputed the findings.
Last week, Merck got the bad news: A study comparing Vioxx with a placebo in 2,600 patients found a twofold increase in heart attacks and strokes, but only after 18 months of continuous use. After a series of closed-door meetings with experts last weekend, Merck decided to withdraw the drug worldwide.
“We believe this best serves the interests of patients,” Merck CEO Raymond Gilmartin said at a press conference.
Company leaders put on a brave face Thursday, vowing not to cut the $1.52 annual dividend and saying Merck has billions in cash and investments to weather the storm.
But they also said the recall will shave at least 50 cents a share, or 16%, off the $3.14 a share analysts expected the company to earn in 2004.
That’s just half of the potential hit, says C.J. Sylvester, an analyst at Schwab Soundview Capital.
“The other half will be the fear of litigation,” he says, referring to a rising number of lawsuits already filed against the company over alleged safety concerns with the drug. “The earnings outlook for Merck is pretty flat. Layer on the litigation risk, and for the time being, this (Merck’s stock) is dead money.”
The news is a big blow to Merck, long considered one of the industry’s untouchables with its pristine AAA debt rating, long history and status. Immediate effects include:
â€¢The stock price. Investors dumped shares of the company after hearing the news. Shares of Merck plunged $12.07, nearly 30%, to $33, their lowest closing price in more than eight years.
After Thursday’s loss, shares of Merck are down 29% this year, far worse than the 3.6% decline of the Dow Jones industrial average and the 5.3% decline this year by the Nasdaq composite index.
â€¢Debt rating. Merck is one of just seven U.S. non-financial companies whose debt has a AAA rating from Standard & Poor’s. AAA is the highest rating possible for debt and shows the company has exceptional financial strength. S&P didn’t downgrade Merck’s credit rating from AAA, but Thursday it did downgrade its outlook to “negative” from “stable.”
“I don’t think it’s fatal, but it’s a significant blow to the company, as you saw with the share price today,” says Trevor Polischuk, global pharmaceutical analyst at OrbiMed, a health care fund manager in New York.
Vioxx and Pfizer’s Celebrex the first drugs in a new class called COX-2 inhibitors hit the market in 1999 to great fanfare. An advertising blitz drew patients to their doctors, seeking the new drugs for arthritis and other pain-causing conditions.
At about $3 a pill, the drugs were more expensive than the older drugs available and far more so than over-the counter remedies, which cost mere pennies a day.
Still, the COX-2 painkillers won favor with those who thought they would be less likely than older drugs to cause stomach problems when taken regularly. Sales of both drugs took off.
Trouble makes itself known
But a year into the launch, Vioxx was hit with questions about heart problems. Meanwhile, other studies questioned whether Celebrex was any easier on the stomach than older drugs. Celebrex has not been definitively linked to a higher risk of heart problems or strokes.
A higher rate of heart attacks was found to occur in patients taking Vioxx than those taking an older drug, a study published in 2000 by The New England Journal of Medicine found.
After that study, the Food and Drug Administration required Merck to add a warning to Vioxx’s label.
Then came another study, this one in 2001 by cardiologists at the Cleveland Clinic, who said they found patients taking Vioxx had more than twice as many heart attacks and strokes as patients taking an older drug, based on a review of Merck’s own raw data and other studies.
Merck and some outside experts raised questions about the validity of the study.
Even the authors cautioned that the study’s findings may have resulted from an effect of the drug that Vioxx was compared with. Perhaps, they said, the older drug reduced the risk of heart attacks and strokes.
The news, coupled with the high price of Vioxx, led some insurers to remove Vioxx and Celebrex from their list of preferred drugs.
More recently, a federally funded study of Kaiser Permanente patients who took either Celebrex or Vioxx found triple the rate of heart attacks in patients taking Vioxx in doses higher than 25 milligrams a day. That study was released in August in France.
Still, on Sept. 8, the FDA approved Vioxx for children with rheumatoid arthritis.
Industry observers criticized the continued marketing and new approvals by the FDA.
“This family of drugs, the COX-2 inhibitors, once referred to as ‘super aspirins’ are turning out to be more like super disasters,” said Sidney Wolfe, director of Public Citizen’s Health Research Group, which has long warned patients not to take Vioxx or Celebrex.
Already, there are dozens of lawsuits filed against Merck over Vioxx, two of which are seeking class-action status.
Lawyer Andy Birchfield says Merck “certainly had signals as early as 1999,” about Vioxx’s dangers. His law firm, Beasley Allen Crow Methvin Portis & Miles P.C., has filed 58 lawsuits against Merck over allegations of stroke or heart attack resulting from Vioxx. The first lawsuit was filed in 2001. One is scheduled for trial in December.
Birchfield charges that the FDA has failed in its role as a watchdog: “You cannot assume that because a drug is on the market now that it is safe and effective.”
But he places the blame on Merck. “If the FDA is not being the watchdog it should be, it does not excuse manufacturers from putting a bad or dangerous drug on the market.”
In a conference call, Merck lawyers said they would defend the company vigorously.
If Merck loses the cases, it faces the potential for damages as well as payments for ongoing medical monitoring of people who took Vioxx, a potentially huge cost.
With Vioxx gone from the market, consumers may switch to one of the other two COX-2 inhibitors, Pfizer’s Celebrex or Bextra. The news may also scare some consumers, leading them to use older drugs, known as nonsteroidal anti-inflammatories, which studies have shown are equally effective in pain relief in most people.
For Merck, the loss of a $2.5 billion product puts more pressure on its pipeline, which many analysts say is weak.
“That’s where they’re in a bit of trouble,” says Polischuk.
He says the most exciting thing Merck has going is a joint venture with Schering-Plough to market a new pill that combines Schering’s cholesterol-absorbing Zetia with Merck’s cholesterol-fighting Zocor. But the news on Vioxx raises worries about the future of another Merck drug now seeking FDA approval: Arcoxia, a painkiller meant to be the heir to Vioxx.
Action was expected from the FDA around the end of October, but that may now be delayed.
Still, analysts say Merck has the strength to withstand the fallout from the Vioxx problem.
The company has a solid balance sheet complete with a cash hoard of $6.2 billion as of the end of June.
“If there’s a company that can afford to withstand a financial hit, it’s Merck,” says Robert Hazlett, analyst at SunTrust Robinson Humphrey. “We expect Merck to be functioning in the industry for a long time. It’s just a cloud that will last awhile.”
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