Merck Needs to Take Its Medicine

With all the brouhaha over Vioxx in the news, it might be easy to forget that there's still an ongoing business over at Merck (NYSE:MRK). While court verdicts may well siphon off a lot of cash from this pharmaceutical giant, Vioxx isn't going to inflict irreparable harm. And while I'm not all that excited about the growth outlook, this company does still have some interesting drugs and vaccines in the late stages of development.

Merck saw reported sales drop by about 2% in the third quarter as the absence of Vioxx made a definite dent in performance. While the company's cholesterol-fighting joint venture with Schering-Plough (NYSE:SGP) is growing well, many of the other large products are more or less stagnant. Zocor was down, Fosamax was flat, and Cozaar/Hyzaar sales were up in the mid-single digits. But Singulair continued to grow at a double-digit clip.

Despite some challenges on the sales front, the company did OK on the operating items. Margins actually improved a bit, and the company was able to post 10% pre-tax profit growth and 7% net income growth for the quarter. Helping matters was good growth in equity income from affiliates, as pre-tax income would have been roughly flat if the company had duplicated last year's performance.

You can't talk about Merck without mentioning the Vioxx litigation, but there's really not that much new to say. The number of cases filed has increased (again) to more than 6,000, and more could still be on the way. Although there will probably be lots of flashy headlines over the coming years about both wins and losses, I wouldn't pay too much attention to them individually. Barring a mass settlement (which, thus far, Merck has said it won't do), it will take literally years for the cases and related appeals to sort themselves out in courts across the country.

Not helping matters right now, Merck has also learned that the FDA wants more data on Pargluva, the dual-PPAR drug for Type 2 diabetes that will be marketed with Bristol Myers Squibb (NYSE:BMY). Although the companies have a sizable lead on the competition for now, an extended go-around with the FDA could potentially sap away a chunk of that advantage. In any case, the news on the Gardasil vaccine for cervical cancer looks promising, as does the news on sitagliptin for diabetes.

Merck has some good products in development, but it will be hard to post solid growth with some major patent expiries approaching. Accordingly, this stock really isn't my cup of tea. Nevertheless, there's a good dividend here, and as both Wyeth (NYSE:WYE) and Schering-Plough have demonstrated, pharmaceutical turnarounds can pay off for patient investors.

For more Foolishness on the legal drug trade:

• More Good News From Novartis
• Vaccines Crucial for Crucell
• Merck Is No Quack

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).