Vioxx litigation lowers Merck's credit rating

Moody's Investors Service and Fitch Ratings had both lowered Merck's credit rating earlier after the controversy related to Vioxx recall started. Today, Standard & Poor did the same.

It is important to point out that Merck had highest possible credit rating so these downgrades do not mean the end of the world for it but will definitely affect it in a negative manner. All credit ratings suspect that the Vioxx recall will hurt its revenues and potential liabilities from patients can have a huge impact on its capacity to do business without significant changes in how it funds R&D.

S&P also is afraid that if found guilty, Merck's eligibility for Medicaid/Medicare reimbursement could be at risk. S&P analysts continue, "We also are concerned that Merck could face over $10 billion in Vioxx-related legal liabilities, which should be covered by annual cash flow of over $6 billion and cash and investments of $13 billion. We are lowering our target price by $3 to $23, factoring in revised p-e and discounted-cash-flow assumptions."