Merck: Why's Stock So Low? (And What Am I Missing?)


Dow component Merckbeat the Street with fourth quarter results on earnings per share (revenue was a sliver below the analyst consensus) and reaffirmed its earnings guidance for this year. Maybe the beaten-down stock is falling victim to another pre-Fed interest rate decision market downdraft, but I'm scratching my head over why it's down so much this morning, yet again.

I'm not an analyst, but the only negative I see is that sales of the cervical cancer vaccine Gardasil went down sequentially. In other words, Merck sold about $80 million less of the product in the fourth quarter than it did in the third quarter. But in some of the analyst earnings preview research notes I read, a sequential decline shouldn't have come as a huge surprise because an end of the back-to-school vaccination season sales drop wasn't unexpected. Nonetheless, Merck says it sold $1.5 billion worth of Gardasil in its first full year on the market.

On the conference call officials said those are unprecedented sales numbers for a vaccine launch. They said seven million girls/young women between the ages of 9 and 26 have received at least one of the three Gardasil shots required, but that another 29 million in that age group in the U.S. have yet to get vaccinated. They're working to get better compliance, too. In other words, to make sure girls/women get all three shots over a six-month period and don't stop after the first or second one.

And Merck hopes to win FDA approval of the shot for women through age 45 which officials said would more than double the eligible population in the U.S. In the meantime, they acknowledged the quarter-to-quarter sales decline was due to the above-mentioned "seasonality." One executive said Gardasil is "poised to have a really good year internationally and we're not concerned about quarterly fluctuations."

Maybe the selloff is due to continued jitters over the fate of the Vytorin/Zetia joint venture franchise with Schering-Plough . The companies sold more than $5 billion worth of the drugs in 2007--a 34 percent increase. Their stocks have fallen over the past few weeks about as much as Vytorin/Zetia prescriptions have reportedly dropped off.

On the call, Chairman and CEO Dick Clark said, "Merck stands behind the safety and efficacy profile of both drugs. We acted with connection with the clinical trial." He called some of the coverage of the controversial ENHANCE study "media hype" and added that it wasn't designed to measure heart-related issues and that the drug's been proven to significantly lower bad cholesterol. A clinical trial is underway to specifically measure so-called cardiovascular outcomes.

In their blitz, off-the-cuff research notes to clients this morning, Barbara Ryan at Deutsche Bank writes: "We reiterate our Buy on MRK, and believe any JV (joint venture) shortfall will likely be offset elsewhere in the base biz and MRK will continue to exceed expectations."

But Goldman Sachs' Jim Kelley says: "Initial enthusiasm for the maintained guidance will likely wane as the recent analyst EPS reductions for the cholesterol JV are not reflected/addressed...."

Goldman Sachs has done and wants to do more investment banking for MRK. It and Deutsche also make a market in the stock and Deutsche owns at least one percent of the shares.

Questions? Comments?