NEW YORK (CNN/Money) - Merck & Co. Tuesday reported its worst annual profit since 1998 after pulling Vioxx off the market late last year and boosted the amount it set aside for lawsuits over the recall of the once popular painkiller.

Merck added $604 million in the fourth quarter to the $71 million it had previously set aside to cover litigation related to Vioxx, the company said Tuesday.

Merck officials also said they believe that losses related to the drug are behind it, news that ignited a rally in the drugmakers' beaten-up stock.

Merck (up $1.10 to $30.95, Research) shares jumped about 4 percent as company officials repeated the 2005 earnings guidance of $2.42 to $2.52 a share they gave analysts in December.

The company also gave first quarter guidance of 54 to 58 cents a share, roughly in line with the current forecast, according to a survey by First Call. Analysts had projected a 6 percent earnings drop to $2.46 earnings for share for 2005, with a 23 percent plunge in earnings to 56 cents earnings a share for the first quarter.

Graeme Bell, Merck senior director of investor relations, said during a conference call that the company currently faces 575 lawsuits alleging personal injury related to Vioxx, and that the $675 million earmarked for lawsuit litigation was the "minimum amount that we believe we can reasonably estimate will be spent."

Bell said that more lawsuits could be filed against the company, but that costs related to the recall were behind them.

The Whitehouse Station, N.J.-based drug maker pulled Vioxx off the market on Sept. 30, citing increased risk of heat attack and stroke.

The company reported net income of $1.1 billion in the fourth quarter, down from $1.4 billion during the same period in 2003.

For all of 2004, Merck reported that net income was $5.8 billion, down from $6.6 billion in 2003 and the lowest since $5.3 billion in 1998. Earnings per share were $2.61 last year, reflecting a 25-cent-a-share unfavorable effect from the withdrawal of Vioxx, according to the company.

"They made the consensus numbers even after taking that charge," said Barbara Ryan, analyst for Deutsche Bank Securities, referring to the newly announced increase in litigation reserves. "The stock has already been pummeled in the last few years. I think with all things taken into account, the earnings were a little better than expected."

The company blamed the withdrawal for 5,100 layoffs last year and $700 million to $750 million in lost sales during the fourth quarter.

Looking ahead, Bell said Merck will submit three new vaccines for Food and Drug Administration review this year, including Rotateq, to protect against a rotavirus-caused diarrhea in infants; Gardasil, to prevent a sexually transmitted infection and the development of cervical cancer, and Zoster, to prevent shingles.

In the fourth quarter, earnings per share fell to 50 cents a share from 62 cents a year earlier.

The company reported a slight increase in worldwide sales, to $22.9 billion last year from $22.5 billion in 2003.