Vioxx recall and lawsuits hurt Merck

In its annual business briefing to analysts and investors, Merck has made two key announcements in the wake of recall of Vioxx and filing of lawsuits against the company by those injured by Vioxx: (Related article: Number of class action lawsuits in the Vioxx case growing rapidly)

1. Merck will cut about 5,100 jobs by year's end, more than originally planned and this will save $300 million on payrolls next year.
2. The company also expects its spending on research and development (R&D) next year to be at the same level as this year

What does Merck's announcement mean?

Merck is essentially preparing to meet its liabilities from recall of Vioxx that are estimated to be as high as $38 billion. While the company has been talking about reassigning its Vioxx staff, it will need to get rid of many of them as its drug pipeline is not as impressive as it should be, particularly with the expiration of Zocor patent.

Keeping the R&D budget at the same level is another indication that Merck will no longer be a powerful player in the pharma sector, which is driven by innovation. Merck has always ranked high on the Innovation Index published by the MIT Technology Review magazine but it is now obvious that its rank will go down.

Merck's stock price has continued to drop since the recall of Vioxx. From a price of around $45, the stock is currently trading at ~$30 as investors lose confidence in the firm and worry that Vioxx lawsuits will sink the company. It will be interesting to see how many more investors will abandon the stock.

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