Investors in Merck (NYSE:MRK) just can't catch a break. Already under fire because of the withdrawn COX-2 inhibitor Vioxx, Merck received a double dose of bad news on Friday. First, the SEC announced that its informal inquiry into Merck's handling of the Vioxx matter had been upgraded to a formal investigation. Secondly, and more serious, the U.S. Court of Appeals in Washington, D.C., decided to invalidate Merck's patent for the once-weekly formulation of blockbuster drug Fosamax. This means that the drug will lose patent exclusivity in 2008 -- some 10 years earlier than the company had been planning.

While the SEC investigation will no doubt draw away time, attention, and money, it probably won't result in any major lasting damage to the company. Of course, with the way Merck's luck has been running lately, "probably" may not be all that reassuring to embattled shareholders.

The Fosamax matter is clearly serious. Fosamax was a $3 billion-plus drug for Merck in 2004. While Merck does not discuss the profitability of individual drugs, my rough guess is that Fosamax is likely worth at least $0.50 to $0.70 per share in annual earnings per share -- a major contribution to be sure. By losing Fosamax in 2008, Merck will be losing a big chunk of revenue right about the time that the business should have been getting back on its feet.

Although losing Fosamax shouldn't threaten the survival of the company, it does represent another pothole in the road to recovery (a road, it should be noted, that wasn't in pristine shape to begin with). This Fool, for one, would be surprised if Merck did not aggressively appeal this decision. With so much money at stake and investors already nervous about the company's prospects, management really can't afford to be seen taking this setback lying down.

Merck's setback also perfectly illustrates one of the biggest risks with investing in turnaround stories -- no matter how bleak, the situation can always get worse. Though the dividend should be secure for the time being, a dividend is cold comfort on days like Friday when the stock gets hammered. Investors looking at Merck might do well to assume the worst for the time being and consider these shares only if they can accept the high risk and uncertainty that now goes with them.

Merck is a Motley Fool Income Investor recommendation.

Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.