MRK has over 6B in cash and had been generating more than that per year on a FCF basis, but obviously FCF will lessen with the removal of Vioxx from the market. WYE's liability for Phen-Fen is 17B already and could be higher. It's hard to guess what MRK's Vioxx liability will end up being, but it seems likely that it will be higher than Phen-Fen once the lawyers get done making claims for everyone who ever even taken Vioxx, even though Vioxx was shown to be a problem for only those who took it long term (apparently greater than 18 months). This is based on the fact that there were 6M patients who took Phen-Fen, and there are at least 84M patients who took Vioxx, though clearly most of them would have been short term users. Perhaps MRK will be able to argue successfully that most of the 84M are not affected, and control the damage in that way, but I believe one of the recent reports stated that 27K patients suffered heart attacks while taking Vioxx, so even at $1M for each of those patients, which seems low, the liability would already be 27B.
As such, it seems that all of MRK's current cash horde and many years of its future FCF will go to paying claims. That probably won't bankrupt the company, unless it seeks some kind of BK shelter as many of the asbestos companies did, but it certainly puts them in pretty poor shape for many years to come. Further, this doesn't even take into consideration what was already going to be declining profits due to drugs going off of patent in the next three or four years.
All in all I can't see MRK being a buy anytime soon. It may well be a short, but I will leave that to others who are more versed in shorting stocks. Suffice it to say that it's unlikely that there will be any significant good news for MRK for quite a while to come, and as such it seems likely that the direction of the stock price will be flat to down.
JMHO
By the way, look for MRK to be removed from the Dow in the near future. They will call it changing the Dow to reflect the current economy or something like that, but basically it will just be to remove what is bound to be a laggard and replace it with something that is more likely to be a winner. |
