Merck moves on, but Vioxx remains a shadow

Tribune Media Services columnist

Q: Now that my shares of Merck & Co. have revived, should I sell them? --K.R., via the Internet

A: As it tries to put the problems from its once-popular painkiller Vioxx behind it, the drug giant is moving boldly forward.

Merck has agreed to pay $1.1 billion to acquire Sirna Therapeutics Inc., a developer of drugs based on the RNA interference technology that attempts to silence the activity of some genes. This creates potential for drugs to target disease-related genes, in particular those contributing to cancer. Two U.S. biologists received the Nobel Prize in medicine for research in that field last month.

Furthermore, the Food and Drug Administration has approved Merck's drug Januvia to treat Type-2 diabetes. It is the first in a new class of DPP-4 inhibitors that enhance the body's own ability to lower glucose.

Cervical-cancer vaccine Gardasil is seen as having the potential for blockbuster sales worldwide and its asthma drug Singular has been selling well. So have cholesterol drugs Vytorin and Zetia that it sells in a joint venture with Schering-Plough Corp.

Shares of Merck (MRK) are up 43 percent this year following a loss of 1 percent last year and a 30 percent loss in 2004. The financial specter of the once-popular painkiller Vioxx looms large.

Merck recently took a hefty charge for potential legal costs related to withdrawal of Vioxx, which had been linked to increased heart attack risk. Though it has won some early cases, the company faces 23,800 lawsuits from former users. It promises to fight them all.

Third-quarter profits fell 34 percent, not only due to those legal fees, but also from declining sales of its Zocor cholesterol drug, which lost patent protection this year and faces generic competition.

As analysts weigh its earnings prospects against its legal issues, consensus rating of Merck stock from the Wall Street analysts who track it is a "hold," according to Thomson Financial. That consists of three "strong buys," six "buys," 13 "holds," one "underperform" and one "sell."

As part of restructuring that began after Richard Clark became chief executive last year, Merck eliminated 500 jobs in the third quarter. It has cut 3,900 jobs since last fall and plans to reduce its workforce by 7,000 by the end of 2008.

Merck earnings are expected to decline 1.2 percent this year versus a projected 10.7 percent increase for the major drug manufacturing industry. Next year's estimated 2 percent increase compares with an 11 percent gain expected industrywide. The projected five-year annualized return of 5 percent compares to the 9 percent forecast for its peers.

Q: I am a conservative investor wondering about Aegis Value Fund. --L.M., via the Internet

A: It focuses on small companies that have been given the cold shoulder by investors.

The emphasis on small is mostly because it's hard to find many mid- and large-cap stocks that sell for considerably less than their underlying value. As the fund trolls for such unloved stocks, it is keeping 22 percent of its portfolio in cash.

The $384 million Aegis Value Fund (AVALX) is up 16 percent over the past 12 months to rank in the top one-fourth of small value funds. Its three-year annualized return of 10 percent puts it in the lowest one-tenth of its peers.

"I've been recommending that current shareholders in Aegis Value stick with it for now, but it is tough to recommend it to new investors at this point," said Greg Carlson, analyst for Morningstar Inc. in Chicago. "Its contrarian approach and the fact it hasn't chased energy stocks is appealing, but the fund has had a few stocks fall rather sharply lately."

Many investors already unloaded their shares in the fund, which once held twice the amount of assets that it has now. That's partly due to big decliners such as Sea Containers, Quaker Fabric and Dominion Homes, and partly to the fact that cash doesn't produce big gains.

Highly disciplined Scott Barbee has been portfolio manager since 1998, seeking firms with temporary difficulties and whose stock is selling at deep discount. He sells once a stock reaches his goal and has avoided altogether some popular areas, including technology and health care.

Aegis Value has low volatility but also above-average expenses, with an annual expense ratio of 1.41 percent. Along with a smattering of other holdings in its portfolio, industrial materials represent 27 percent, financial services 21 percent, consumer goods 20 percent and consumer services 19 percent.

The largest stock holdings recently were Alliance One International, PMA Capital, Sea Containers, Dillard's, Imperial Sugar, Books-A-Million, SCPIE Holdings, Audiovox, Superior Industries International and CF Industries Holdings.

This "no-load" (no sales charge) fund requires a $10,000 minimum initial investment.

Q: Where can I complain about a broker? --A.S., via the Internet

A: First, contact the broker to see if the matter can be resolved. If that doesn't work, escalate your complaint to the firm's branch manager or to its compliance department.

If that fails, you can turn directly to the Securities and Exchange Commission, the NASD (a securities industry self-regulatory group) or your state's securities regulators.

"You can file a complaint about a broker directly with us, the SEC, online by going to our home page," said Lori Schock, acting director of the SEC's Office of Investor Education and Assistance in Washington, D.C. "We contact the brokerage firm's compliance department and can compel it to respond to the investor and SEC in writing to lock in its position on the matter."

The brokerage firm may try to rectify the problem and settle the matter to get it out of the way.

Once the investor has the brokerage firm's response in writing, you can take it a step further to mediation or arbitration, mostly done through the NASD. You can contact the NASD directly with a complaint at its Web site,

Andrew Leckey is a Tribune Media Services columnist. E-mail him at

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