Merck and Co.'s settlement of two outstanding class action suits today,
which could result in $688 million of payments to plaintiffs, is
manageable in light of the company's strong liquidity position,
according to Fitch Ratings.
The two suits, filed since December 2008, allege that Merck and Schering-Plough executives delayed the release of unfavorable results from a study that could have adversely affected sales of the company's Vytorin cholesterol drug. The suits are pending in the U.S. District Court for the District of New Jersey against Merck, Schering-Plough, and certain current and former officers and directors.
The proposed agreement, which contains no admission of liability or wrongdoing, requires the company to pay $215 million to resolve the securities class action against all of the Merck defendants and $473 million to resolve the securities class action against all of the Schering-Plough defendants. Merck recorded a charge to fourth-quarter 2012 earnings of $493 million, net of expected insurance recoveries. Finalization of the settlement is pending court approval.
We expect Merck's credit profile to remain consistent with the company's 'A+' rating once cash payments to plaintiffs have been disbursed. As of Sept. 30, Merck's liquidity included $18.1 billion in cash and short-term investments, $4.5 billion in FCF, and full capacity under a $4 billion credit facility maturing in May 2017, which provides the company with substantial flexibility to fund the settlement.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed on Fitch's website. All opinions expressed are those of Fitch Ratings.
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