What Merck Gains by Settling

The pharmaceutical powerhouse enjoys a shot in the arm to its stock after putting its Vioxx litigation to rest. Now it can focus on bringing new drugs to market

On Nov. 9 pharmaceutical giant Merck (MRK) said it would pay $4.85 billion to settle 27,000 lawsuits over its drug Vioxx, a painkiller pulled from the market in 2004 after it was linked to heart attacks and strokes. The company had once vowed to fight each suit separately, but it's no surprise Merck opted for a settlement now. It had prevailed in an impressive 10 of 15 rulings so far, likely giving it leverage to negotiate with plaintiffs' lawyers. And this deal let Merck focus on an ongoing turnaround effort, without the cloud of perpetual Vioxx litigation.

Unlike the $3.75 billion settlement reached in 1999 for Fen-Phen, the American Home Products diet pill that was linked to heart-valve disease, the Vioxx arrangement largely shields Merck from future claims related to Vioxx. Plaintiffs wishing to dip into the $4.85 billion will have to prove they had strokes or heart attacks, and that those ailments occurred around the time they were taking Vioxx. Once they opt in, they can't decide to opt out later and bring separate suits against Merck. And Merck has the right to bring claimants to court if the company feels they haven't met the burden of proof. "They guarded themselves against future hemorrhaging," says Jami Rubin, an analyst for Morgan Stanley (MS). "I think this will set the new standard for how to handle product liability suits."

Transformation Effort

The settlement comes at a fortuitous time for Merck, which is engineering a turnaround that few expected would be possible after Vioxx was pulled from the market. On Oct. 22, the Whitehouse Station (N.J.) company said profit for the first nine months of the year jumped 24% over the same period last year, to $4.9 billion, on sales that rose 8%, to $18 billion. The company is charting better-than-expected sales of products such as Gardasil, a vaccine to fight a leading cause of cervical cancer, and Januvia, a diabetes pill. Over time, the settlement will virtually erase $600 million in annual litigation costs.

Since becoming CEO in May, 2005, Richard Clark has embarked on a wholesale transformation of Merck. While the Vioxx cases were being fought by his legal team, he concentrated on streamlining the research process so the company could get potential blockbusters to market faster. Now teams of scientists interact with executives from marketing, manufacturing, and other far-flung units early in the development of each drug.

First To Market

In the case of Januvia, that interaction resulted in a plan that cut months off the development timeline and allowed Merck to beat rival (BusinessWeek, 7/30/07) Novartis (NVS) to the market. Analysts expect Januvia to bring in more than $700 million in revenue this year. Meanwhile, Novartis' drug has been hampered by safety concerns and is still waiting for approval from the Food & Drug Administration.

Clark's more streamlined approach to drug development paid off recently with another medicine that analysts are calling a potential blockbuster. In September, Merck announced that it was initiating late-stage clinical trials for a treatment for the bone disease osteoporosis. In earlier trials the drug appeared to increase bone density. "Existing drugs don't build bone, so this could be a major advance," says Dr. Jon LeCroy, an analyst for Natixis Bleichroeder. What's more, Merck's $3 billion-a-year osteoporosis drug, Fosamax, will go generic next year, making the need for a worthy replacement particularly pressing.

Clark's unexpected success has propelled Merck's shares 31% this year. Wall Street applauded the Vioxx settlement, sending the stock up 2% to $55.90 on Nov. 9. "There was an overhang on the company," says Clark of the Vioxx litigation. "We've put that aside."

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