Merck & Co reported disappointing quarterly sales and took an almost $1 billion charge related to a previously disclosed U.S. government probe of its recalled Vioxx arthritis drug, sending its shares 2.1% lower.

Merck, like most big U.S. drugmakers in the third quarter, beat profit forecasts on Friday even though its sales fell short, as results were bolstered by cost cuts or other factors. And as with its rivals, investors seemed to pay greater heed to the sales disappointment.

"The third quarter featured slightly lighter revenues, better expenses and better tax rate," said Credit-Suisse analyst Catherine Arnold of Merck's results, describing them as a "low quality beat" because of the sales shortfall.

The earnings report includes an array of drugs and consumer products acquired through the company's purchase last November of New Jersey rival Schering-Plough.

Global revenue almost doubled to $11.12 billion in the quarter. But that was shy of the average Wall Street forecast of $11.24 billion.

Analysts said growth of arthritis drug Remicade, acquired in the Schering-Plough merger, was weaker than expected due in part to price pressures in Europe.
Third-quarter earnings of the combined company fell 89% to $372 million, or 11 cents per share, reflecting merger charges and a charge for setting aside a $950 million Vioxx legal reserve.

The charge relates to an ongoing probe by U.S. prosecutors in Massachusetts of how Merck had marketed Vioxx - Merck's onetime blockbuster arthritis drug that was recalled in 2004 after being linked to heart risks.

Company spokesman Steven Campanini said Merck continues to have discussions with prosecutors.

"Until they are concluded, there can be no certainty about a resolution, so the company took the (legal) reserve," he said.

Merck agreed in 2007 to pay $4.85 billion to settle lawsuits filed by former Vioxx users, who alleged they had been harmed by the pill.

Les Funtleyder, a portfolio manager for Miller Tabak & Co, said Wall Street was aware of the federal probe, but was not overly concerned about it because the bigger threat of product liability lawsuits has been overcome.

"Vioxx is considered over and done with," he said.

Excluding special items, including $638 million in tax benefits, Merck earned 85 cents per share in the third quarter. Analysts on average expected 82 cents per share, according to Thomson Reuters I/B/E/S.

"The key contributors to the earnings beat, relative to our estimates, were higher equity income and a lower tax rate," Sanford Bernstein analyst Tim Anderson said in a research note.

Merck raised the lower end of its full-year 2010 earnings forecast, excluding special items, by 2 cents per share, to $3.31, while keeping its high-end forecast of $3.39 per share.

The company still expects high single-digit compound annual profit growth from 2009 to 2013, when compared to earnings last year. Remicade sales rose 9% in the quarter to $661 million, while sales of asthma drug Singulair - Merck's biggest product, rose 12% to $1.2 billion.

Sales of cholesterol fighter Zetia rose 1% to $571 million. Vytorin, which combines Zetia with Merck's older cholesterol drug Zocor, fell 8% to $485 million. It has been hurt by studies that question the combination product's effectiveness.