Why Merck Remains Unsettled

Despite being ordered to pay an additional $9 million in punitive damages in a Vioxx trial, the drugmaker vows to fight on

Merck (MRK) has always been a science-driven company. So as the drugmaker set out to defend itself against the thousands of lawsuits piling up over its withdrawn painkiller Vioxx, the company based its defense on some key scientific evidence. First, the company argued that it had shared data on all key Vioxx studies promptly with the Food & Drug Administration. And the company contended that while studies linked long-term use of the drug to an increased risk of heart attack, patients who had high cholesterol and other risk factors would have a hard time proving Vioxx caused the heart attack.

As the recent verdict in Atlantic City, N.J., showed, that may not be the case in many trials. On Apr. 11, a jury awarded plaintiff John McDarby, 77, $9 million in punitive damages. That's on top of the $4.5 million in compensatory damages the jury awarded last week to McDarby and his wife (see BW Online, 4/7/06, "Merck's Latest Heart Flutter").


  The punitive damages came despite what analysts, including Lehman Brothers' C. Anthony Butler, said was a lack of evidence that Merck withheld critical data from the FDA. And it also came despite the fact that McDarby had previous risk factors for a heart attack, including the fact he's a diabetic. The lesson: Merck's expectation that the scientific evidence would help it prevail in most cases may be wishful thinking.

The company, however, is hardly about to back off. Merck's general counsel, Kenneth Frazier, says the company will appeal the verdict in the McDarby case as well as the punitive damage award. Frazier adds the company was heartened by the fact that the jury didn't find in favor of a second plaintiff in the case. Frazier says the appropriate data on Vioxx was on the product's label one year before Mr. McDarby had his heart attack. "We absolutely believe our conduct was proper," Frazier said following the punitive damages decision. "We acted responsibly every step of the way."

Most observers agree Merck has little choice but to continue to fight the Vioxx cases in court. After all, drugmaker Wyeth (WYE) tried to settle the cases stemming from the 1997 withdrawal of its diet drugs Pondimin and Redux. But the company was flooded with claims after it created a trust to settle the matter. And many of the plaintiffs with the strongest cases opted out of the initial settlement and continued to pursue their cases in court.


  The result: Wyeth has ended up taking more than $21 billion in charges, a figure many times higher than what Wall Street originally expected. (see BW Online, 2/6/06, "Cracking the Whip at Wyeth")

So Merck will continue, as Frazier insists, to handle the Vioxx cases on an individual basis. The upside to that strategy is that the payment of any liability will be spread over many years rather than requiring a massive, near-term payout. But the downside is that investors will have to weather many Vioxx verdicts like the one seen last week.

Merck will win some and lose some. But the uncertainty about the Vioxx liability will linger. As Edwin Ciskowski, a portfolio manager at the investment firm Broadview Advisors says: "This will be a cloud over Merck for five or 10 more years."

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