Merck: More Agony from Its Painkiller

The costly Vioxx verdict makes its plan to take on each claim individually more difficult. But a big settlement is no easy cure, either

By Amy Barrett

Merck & Co. CEO Richard T. Clark is scheduled to meet with some big investors in the coming weeks. Among them is Lenny Shimunov, a vice-president and portfolio manager at Dreman Value Management.

Shimunov figures Merck (MRK ) is trying to give Clark "more visibility." And it's not hard to guess why. Clark needs to address a central question with its shareholders -- Merck's legal strategy in the wake of a $253.5 million civil court award against the drugmaker in the first case over its withdrawn painkiller Vioxx to make it to trial.


  Unfortunately for Merck, the Aug. 19 decision by a Texas jury raises big questions about how the company can fend off the mountain of Vioxx suits it faces. It has two possible routes: Strike a big settlement to resolve most of these cases, or take on each case individually. But both approaches are fraught with risk for the drugmaker.

Merck General Counsel Kenneth C. Frazier has maintained that Merck will resolve each case individually -- either in settlement or in court. On Aug. 20, one day after the Texas verdict, Frazier put out a statement reiterating that position. "We believe we have meritorious defenses," Frazier said in the statement, "and we intend to vigorously defend individual Vioxx cases one by one."

But Friday's verdict makes it clear that approach may prove difficult. Already some 4,200 cases have been filed against the company over Vioxx. And the jury rendering in the Lone Star State makes it likely more victims will head to the courts.

That's because the Texas case was not seen as a very strong one for the plaintiff, Carol Ernst. Ernst is the widow of Robert C. Ernst, a Vioxx user who died of an arrhythmia, or irregular heartbeat. And while Vioxx was linked in studies to a heightened risk of heart attacks and strokes, it was not shown to cause arrhythmias.


  But plaintiff lawyer W. Mark Lanier presented testimony that the arrhythmia could itself have been triggered by a heart attack. With even this complex case bringing a massive verdict against Merck, other trial lawyers are likely to be emboldened to take on cases against the drugmaker that are less clear cut.

So should Merck try to reach some massive settlement of the claims? That will be extremely difficult as well. Consider the case of drugmaker Wyeth and its diet drugs Pondimin (the fen in the fen-phen combo) and Redux. After pulling the products from the market in 1997, Wyeth struck a settlement three years later to resolve many of those cases.

Instead of defusing potential claims, the settlement spawned a network of trial lawyers and medical testing operations to help people who took the drugs to qualify for the payouts under the deal. The result was a flood of claims that far exceeded what Wyeth anticipated. Rather than settle, many patients with the most serious claims went to court.

The result: Wyeth has taken $21 billion in charges to date to cover the cost of the diet-drug debacle. That number far exceeds what most on Wall Street initially thought the affair would cost.


  Merck could certainly face a similar quagmire. That's because no telltale sign distinguishes a heart attack brought on by Vioxx from one brought on by other causes like heart disease. So it would be difficult to find a firm way to identify those who were injured by the drug from those whose heart attacks were not actually brought on by taking Vioxx.

That's why, for now, Merck will stick with a strategy of defending itself against these cases one by one. Merck is appealing the massive Texas award, and analysts say that amount will likely be reduced due to limits in that state on punitive damages.

For now, the pharmaceutical giant is on solid financial footing. Lehman Brothers analyst C. Anthony Butler says the company generated $8.8 billion in free cash flow in the last year. Still, it looks like the cost of fending off Vioxx suits is going to mount.

Barrett is a correspondent for BusinessWeek in Philadelphia

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