MERCK'S RATING FALLS DUE TO PATENT LOSSES, VIOXX LITIGATION
Fitch Ratings downgraded Merck's ratings as the company faces major patent losses and continued liability damages from Vioxx lawsuits.
Fitch downgraded Merck from "AA" to "AA-," expecting troubles as the company loses patent protections through 2012 on four of its top-selling products: cholesterol drug Zocor; osteoporosis treatment Fosamax; high blood pressure treatment Cozaar; and asthma drug Singulair. These products alone generated 56 percent of Merck's total revenue in 2006, Fitch said.
Merck also faces trouble with continued Vioxx legislation, Fitch said. Approximately 27,400 cases have been filed against the company, and the final damages are highly uncertain, Fitch added. In its last earnings report, Merck announced it would increase its legal reserves for Vioxx litigation to $858 million.
The company also established a reserve of $48 million for future legal defense of Fosamax. As of the end of last year, 104 Fosamax-related cases had been filed against Merck, the company said, adding it does not expect any trials until 2008. The suits claim that Fosamax causes osteonecrosis of the jaw.
Further litigation risk comes from a Department of Justice investigation regarding Merck's sales and marketing practices, Fitch said. In addition, Merck is involved in a tax dispute with the Canadian Revenue Agency for $1.76 billion. Merck recently settled a tax dispute with the IRS for $2.3 billion.
Merck's profile improvement depends on operating cost efficiencies from restructuring and strengthening equity income from joint ventures, Fitch said. The company also said Merck has "excellent liquidity" with more than $9 billion in cash and short-term investments at the end of the third quarter of 2006.
Merck may seek a large corporate acquisition to strengthen its pipeline and product portfolio, Fitch said, adding that the company will also engage in more external licensing deals and small acquisitions to support its R&D program, especially for biologic products.