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Costly recall reckoning

Oct 26, 2007 | Associated Press | Seattle Times

After Merck recalled Vioxx, a painkiller linked to heart attacks and deaths, in September 2004, it took more than two years for its shares to recover.

"Health recalls are always scary. There's a lot of headline shock," says Ross Koesterich, senior portfolio manager at Barclays Global Investments.

Merck waged a public battle fighting Vioxx-related lawsuits. "Merck took a lot of heat. Many people questioned why they hadn't come forth earlier [with the recall]," says Barbara Ryan, analyst with Deutsche Bank.

The company has won many cases and is appealing losses so it has not had to pay damages so far. Merck set aside $720 million just for legal expenses.

It had an impressive third quarter, due largely to its Gardasil cervical-cancer vaccine.

"Vioxx will linger for years, but they moved forward, and that's the key," says Ryan, who rates Merck a " buy." "They kept new drugs and vaccines in their pipelines, kept growing the business."

Lead balloon

One recall is bad enough, but Mattel had three in just over a month, causing the shares to lose 11.9 percent.

"We do not expect the worst is over for the company on the recall front," says Gerrick Johnson, analyst for BMO Capital Markets, who rates Mattel "underperform."

"We believe the damage to the brand could cause performance to suffer more than many expect. Maybe it will pass in '08, but this holiday season will be a rough one," Johnson said.

1. Aug. 1: 1.5 million toys recalled worldwide, due to lead paint

2. Aug. 14: 19 million toys recalled worldwide, due to lead paint and small magnets that could be swallowed

3. Sept. 4: 800,000 toys recalled, including 675,000 Barbie accessories

4. Sept. 21: A top Mattel official apologizes to China's product-safety chief for blaming Chinese manufacturers for its problems