Merck's Latest Heart Flutter

A jury's mixed message on painkiller Vioxx has hit the stock and called into question the outfit's policy of fighting each case individually

Merck (MRK) investors seemed to be growing comfortable with the drug maker's strategy to fight lawsuits over its withdrawn painkiller Vioxx. The company had maintained it would fight each case individually -- and not enter into a big global settlement.

After winning two out of three cases that had come to trial, that strategy appeared sound. Plus, Merck's stock had been climbing over the previous six months, to a recent $36, because of good news about some of the company's upcoming products, including its much-anticipated cervical cancer vaccine. (see BW Online, 3/6/06, "Merck: Out of the Ivory Tower").


  But the split verdict on Apr. 5 in two cases being heard in Atlantic City, N.J., may change investors' outlook. The jury awarded one of the plaintiffs in the case, John McDarby, who suffered a heart attack, $3 million, with his wife receiving another $1.5 million for loss of "society and services of her husband."

At the same time, the panel was unconvinced that Vioxx was a major factor in the heart attack of the second plaintiff, Thomas Cona. Merck's stock fell around 4%, to $34.61, on Apr. 6 on news of the verdict, which was announced after the markets the day before.

The trial, in Merck's home state, was being closely watched on Wall Street because it was the first to involve patients taking the drug for a long period of time. When Merck pulled Vioxx in the fall of 2004, it was because a study had linked the painkiller to increase risk of heart attack in patients who had taken it for more than 18 months.


  Merck had prevailed in a previous Vioxx case in New Jersey, but that plaintiff had only taken the drug for a short period (see BW Online, 11/3/05, "A Weak Tonic for Merck").

Credit Suisse research analyst Catherine J. Arnold wrote in a note after the most recent verdict that most investors she communicated with had been convinced Merck would prevail in the case. That's because both Cona and McDarby had significant risks for a heart attack even before taking Vioxx, and investors believed the jury would be unwilling to blame the men's heart attacks mainly on the drug.

In fact, Merck's General Counsel Kenneth C. Frazier has maintained that Merck acted responsibly in its handling of Vioxx, and that plaintiffs with conditions making them more likely to suffer a heart attack would have a hard time proving that Vioxx was the real cause of their attacks. But plaintiffs' lawyers, such as Paul Pennock, who was not trying the Atlantic City case, have argued that giving Vioxx to someone with high cholesterol and other risk factors for heart disease is like "throwing fuel on the fire." It now appears juries may be inclined to agree with that reasoning.


  The next step in the Atlantic City case is for the jury to consider whether to award punitive damages. But there was a bit of good news for Merck in the verdict as well. The second plaintiff, Cona, said he had taken the drug for a long period but did not have prescription records to prove it. SG Cowen analyst Stephen M. Scala says the fact that the jury did not find for Cona means that plaintiffs without hard data to show they took the drug long-term are unlikely to prevail. Had Merck lost in that case, Scala says, it would have "opened a Pandora's box."

What this verdict does not do, however, is give investors much more certainty about what Merck's ultimate tab will be on the Vioxx debacle. The estimates have ranged from $10 billion to as high as $50 billion. (see BW Online, 12/5/05, "Presto: A New Vioxx Liability Estimate!").

Merck watchers say there will need to be many more trials before it becomes clear what Merck's ultimate payout will need to be to resolve the nearly 10,000 cases it faces. It looks as though the pain from the Vioxx withdrawal is far from over.

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