Merck in Lukewarm Water

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Merck (NYSE: MRK) hasn't had the best publicity over the last couple of months, but I'm not sure that investors should worry about its latest black mark.

Yesterday, Merck announced that it had agreed to pay $649 million (plus interest) for overcharging Medicaid programs. Federal law requires drug companies to charge Medicaid the lowest available price for drugs they sell to the program.

Merck didn't admit that it had done anything wrong. In fact, it's sticking to the argument that it just interpreted the law differently. The law that established the Medicaid lowest-price policy allows deep discounts (aka "nominal pricing") to be excluded, so that companies won't be penalized for selling drugs cheaply to charities. Merck took advantage of that loophole by selling to hospitals at a deep discount to encourage them to prescribe drugs.

Merck isn't the only company to risk potential trouble for skirting nominal-pricing rules. AstraZeneca (NYSE: AZN) and GlaxoSmithKline (NYSE: GSK), among others, have also reported that they're being investigated.

The settlements shouldn't hurt sales, since Merck has discontinued the pricing practices in question. Moreover, the lawsuits cover four has-been drugs -- Mevacor, Zocor, Vioxx, and Pepcid -- all of which either have generic competition or are no longer sold by Merck.

Compared to its $4.85 billion Vioxx settlement, the payout is a drop in the bucket. In fact, the company already took a $670 million charge in last year's fourth quarter in expectation of the settlement.

The bad publicity certainly won't help, but since Merck and Schering-Plough (NYSE: SGP) have much bigger issues to worry about with Vytorin and Congress, I'd say investors have little to fear from this settlement.