Wyeth: The Class Action That Wouldn't Quit
It's a headache no pill can cure. For Wyeth Corp. (WYE ) investors, the company's diet-drug woes are producing one surprise after another -- and none of them positive. First, its two diet drugs, Pondimin (the fen in the diet-drug cocktail fen-phen) and Redux, were withdrawn from the market in 1997 after they were linked to valvular heart disease. Then, over the ensuing years, the cost of the problem continued to escalate -- with the company taking big charges for the mess ever since.
Now it looks like the final tab is likely to go higher still. A $3.75 billion settlement trust designed in 2000 to compensate those who suffered valve damage after taking the drugs is near collapse, as a flood of claims threatens to overwhelm it. In early May, the court agreed to temporarily halt payouts from the trust to people with the least serious injuries while a new deal gets worked out. Many plaintiffs' attorneys believe the odds are good that enough diet-drug users will agree to go along with a new arrangement -- which in turn would drastically lower payments to some claimants. But if a new accord can't be reached, the trust would likely go bust, forcing some plaintiffs to go after Wyeth in federal court.
Meanwhile, Wyeth's estimate of the ultimate cost of the debacle keeps rising -- to $16.6 billion and counting. While much of that was paid out to settle earlier cases, billions more in potential liability are piling up. It's no surprise that the stock, now at around $38, is down about 15% since a mid-January peak. "The world has underestimated the magnitude of liability here," says Prudential Equity Group (PRU ) analyst Dr. Timothy M. Anderson.
The diet-drug disaster serves as a cautionary tale for any company trying to dig its way out from under an avalanche of product-liability cases. The terms of the settlement Wyeth agreed to may have, in fact, increased the ultimate bill. That's because the deal spawned an army of lawyers, doctors, and others who spread out to recruit as many patients as possible who might have suffered the heart-valve damage associated with the drugs.
That can be true of any number of large class actions. But the nature of the injury associated with Wyeth's diet drugs -- involving leakage of certain heart valves -- can be difficult to pinpoint with a high degree of accuracy. And that makes eligibility particularly tricky and easy to game. The result: The number of claims has far outrun anticipated levels. On top of that, there are 50,000 individual lawsuits -- cases filed by people who got tested under the original settlement and then decided to opt out of the deal and sue directly. Prudential's Anderson figures Wyeth may be facing as much as $7.5 billion more to resolve the matter. "Wyeth underestimated the ability of the legal profession to mobilize for this sort of major tort issue," says CIBC Oppenheimer (BCM ) analyst Mara Goldstein.
The original settlement was aimed at getting money to victims quickly and without a big fight. In fact, the opposite has happened. After being inundated with claims, the trust contended that thousands appeared questionable, generated by attorneys who created assembly-line claims-processing services with the help of well-paid physicians and medical-testing firms. So the trust hired Richard L. Scheff, a former federal prosecutor, in April, 2003, to ferret out the alleged frauds. The trust has since sued two cardiologists it says signed off on bogus filings -- one of whom vouched for about 2,500 claims alone. In the process, payments have nearly ground to a halt. "I've met all the deadlines and have done everything they told me to do," says April Linder, a 36-year-old mother of two who awaits a $500,000 claim review.
How did Wyeth's plan go so wrong? Under the 2000 settlement, patients would get echocardiograms -- which use sound waves to study the heart -- to determine whether they had heart-valve damage after having used the drugs. Depending on the level of damage -- as well as other factors such as age and other health problems -- they would get payments ranging from $25,000 to $1.5 million.
But as claims started flowing in, Wyeth and the trust realized the cases and bills far exceeded what had been projected. Facing what it described in court papers as a "process hijacked by lawyers stamping out tens of thousands of baseless claims," the trust went on the offensive and hired Scheff. His investigation zeroed in on more than a dozen doctors who signed off on thousands of claims and earned millions of dollars from plaintiffs' lawyers. In some cases, the attorneys paid them higher fees if their reviews found a patient qualified for a claim.
Scheff's team has now sued two doctors, New York cardiologist Dr. Richard L. Mueller and Dr. Linda J. Crouse, a physician in Kansas City, Mo., for allegedly defrauding the trust. Crouse has denied doing anything improper and has filed a counterclaim, charging, among other things, that the trust has "engaged in an...effort to discredit and ruin" her and has created an atmosphere "akin to the Salem Witch Trials." Wayne E. Cousin, Mueller's attorney, says his client is seeking to dismiss the charges and that Mueller "performed and interpreted the echocardiograms properly at all times." The trust is also trying to block test results from one so-called echo mill, which conducted more than 70,000 echocardiograms on diet-drug users.
Fraud may be one of Wyeth's problems, but so is the ambiguous science involved in the allegedly related disease. Dr. Catherine M. Otto, a professor of medicine at the University of Washington who has consulted for the trust, says a small amount of heart-valve leakage is common, though most people won't develop a heart problem as a result. Determining from an echocardiogram what leakage is normal and what's dangerous is tricky. The standard Wyeth uses may be capturing those with normal leakage. "The definition they used included a lot of people where the valve leaks, but it won't cause a problem," Otto notes.
Given that reality, even if blatantly fraudulent claims were stripped out, the diet-drug trust could still be in danger of running out of money. So Wyeth is trying to create a fund to pay out the bulk of the claims -- 40,000 at last count -- that involve people with relatively minor valve leakage. Patients would only get a fraction of what was promised in the original settlement, but they would be guaranteed something. People with more serious injuries, including those who need valves replaced, will still get the more generous sums laid out in the 2000 deal.
That would still leave about 50,000 people who have taken a pass on the settlement and are suing Wyeth in court. And while the judge overseeing all the diet-drug litigation has limited some of the allowable evidence, that restriction could be eliminated on appeal by the trial lawyers -- and Wyeth's tab could balloon. "That is an iceberg floating toward Wyeth right now," says George M. Fleming, an attorney representing 9,000 such diet-drug users. And yet another potential nasty surprise for Wyeth investors.
By Amy Barrett in Philadelphia