Interesting take on the MRK v. MTC debate at thestreet.com. Free trial period if anyone's interested.( I feel obligated to mention that since I'm lifting thier piece!
Top Stories: Merck on Message: Bet Against Us and You'll Feel the Pain
By Jesse Eisinger
Senior Writer
12/10/98 12:09 PM ET
Ed Scolnick is tall and jowly, and when an investor asks him a question, he closes his eyes and shakes his head rapidly. The head of Merck's (MRK:NYSE) research-and-development efforts has the slight stoop and furrowed brow of a Supreme Court justice. Irascible and brilliant, he is the embodiment of the Merck bravado.
At Merck's analyst meeting Wednesday, he turned in a classic performance. It was Scolnick's show, and he took the opportunity to brag about the company's new painkiller, Vioxx.
Watching Scolnick's performance, who would want to broach Merck's problems? The Whitehouse Station, N.J., company has a host of them. Patent expirations in 2000 and 2001 on major products like heart drug Vasotec and ulcer pill Prilosec, which together accounted for 25% of Merck's pharmaceutical sales in the first nine months of this year? Pshaw. Intense competition facing cholesterol drug Zocor, AIDS treatment Crixivan and heart drugs Cozaar and Hyzaar? Yawn. Mixed performance from its newest drugs, with baldness pill Propecia and migraine therapy Maxalt not getting the job done? I'm sorry, were you saying something?
After all, many smart health-care investors were worried about Merck a year ago, and look where it got them: The stock was up more than 50% in one year before Wednesday, outperforming the Amex Pharmaceutical Index.
Yet despite Vioxx's promise and Scolnick's mastery, Wall Street suddenly got scared after ignoring the looming problems for eons. Investors sold Merck Wednesday because the company lowered its earnings guidance for next year. Ray Gilmartin, the CEO and chairman, projected Merck would earn between $4.85 and $4.95 a share next year, up from a range of $4.27 to $4.34 a share this year. The consensus for 1998 is $4.30. Since the First Call estimate was at $4.97 for 1999, several analysts cut their numbers Thursday. Deutsche Bank and Warburg Dillon Read downgraded, Deutsche to accumulate from buy and Warburg to hold from buy. Neither has done any recent underwriting for Merck.
Analysts are cutting estimates as Merck's spending rises. The company will add 700 sales representatives and boost its R&D budget 14% next year to $2.1 billion. Gilmartin gave his earnings guidance at around 3:30 p.m., giving a couple of sell-siders the opportunity to make calls to their sales forces. Merck shares fell 6 3/4 to close at 151 15/16 Wednesday after trading as high as 161 3/4.
But Scolnick's bold talk about Vioxx, a COX-2 inhibitor for inflammation and pain, eased concerns about the competition from the main competitor, Celebrex from Monsanto (MTC:NYSE) and Pfizer (PFE:NYSE). "Short-term high-dose, long-term low-dose, it's a wonderful drug," said Scolnick, shaking his head as if amazed at the productivity and innovation of Merck scientists. "Vioxx has lived up to our highest expectations."
Analysts expect the COX-2 inhibitors to be the next multibillion-dollar medicine class. They work as well as high doses of current nonsteroidal anti-inflammatory drugs, such as ibuprofen and naproxen. But the COX-2s don't appear to cause the gastrointestinal bleeding and ulcers that sometimes afflict users of the nonsteroidal anti-inflammatory drugs.
Scolnick said Wednesday that he believed the company would get fast-track approval for the drug from the Food and Drug Administration, which means Vioxx could be on the market six months after Nov. 23, when Merck filed its new drug application.
Celebrex will be on the market by the beginning of the year, analysts predict. Investors are worried that being first would give Monsanto and Pfizer a significant advantage. But Scolnick emphasized that Merck has extensive data documenting its drug's effectiveness in treating pain in different populations, while Celebrex has more limited data.
And in one major trial of Vioxx, the drug's safety profile showed statistical equivalence to placebo, Scolnick said. Monsanto, which did fewer and smaller trials in fewer patient populations than Merck, has shown only that there is no statistical difference between Celebrex and a placebo. Those two things could help in the marketing struggle, predicts Jack Lamberton, an analyst for HSBC Securities, which has not done any underwriting for Merck. Lamberton, who raised the stock to a buy Thursday morning, says the data for Vioxx were stronger than for Celebrex.
Scolnick's braggadocio tipped the scale. Asked about comparison trials with Celebrex and Merck's pill he said, "I have no reluctance to do [head-to-head] trials having seen their data."
One major New York health-care investor who is long Merck says, "They're so comfortable, they're doing head-to-head studies. That tells you they have a real advantage. It might have a nice aura effect" in the marketing of the drugs.
"The meeting was a push," says Alan Sebulsky, an influential health-care portfolio manager for Lincoln Capital, which is long the stock. But "my bias is positive going into the Vioxx launch," Sebulsky said. "The two drugs are going to be enormous."
At Wednesday's close, Merck's stock traded at around 31 times the midpoint of the 1999 earnings-estimate range. That ranks Merck among the cheapest in the group, Lamberton says. And it was getting cheaper Thursday. Even after the haircut Wednesday, the stock was off 3 3/4 to 148 3/16 Thursday.
The reasons for pause on Merck came to the fore again.
Jami Rubin of Schroder & Co., who has a neutral rating on Merck, says that even if Vioxx hits her estimate of $1.5 billion in sales in 2002, it will only contribute 5% to Merck's bottom line. If it hits $2 billion, she says, it's still worth only 6% or 7%. "Last year, it was a layup," she says. But now, she's a bit more cautious: "The leverage is small. Celebrex is clearly more important to Monsanto than Vioxx is to Merck." Schroder has not done any recent Merck underwriting.
"Even now, a lot of the products are slowing," says Jeff Chaffkin, an analyst for PaineWebber who rates the stock neutral. (PaineWebber is not a Merck banker.) Vioxx, as any new drug, will not be profitable for about its first year of sales. "They'll have stable earnings growth in the double-digits for a couple of years, and then it will slow down a bit -- perhaps in the single digits -- in 2000, 2001," Chaffkin says of Merck. "In that environment, I don't see how the multiple expands."
But he concedes, "Investors want high-quality growth stocks that have lagged their group. Merck is the epitome of that."
In other words, despite the concerns, don't mess with Merck.
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