Merck & Co. (MRK) once vowed to fight the massive Vioxx litigation case-by-case over many years. So why has the drug maker agreed to settle most of the lawsuits, and why now, after posting a winning record with juries?
Merck says the $4.85 billion proposed settlement announced Friday gives a measure of certainty about Merck’s ultimate Vioxx liability and allows the Whitehouse Station, N.J., company to focus better on developing and selling drugs. Also, Merck noted, it has set aside $1.9 billion for Vioxx legal defense costs since 2004, which have eaten into its profits.
"The decision we made today was a pragmatic decision, given the fact that we could have defended against each case over many years, but that would have come at a cost to the company and its shareholders," Kenneth Frazier, head of Merck’s human-health unit and its former general counsel, said on a conference call Friday with analysts and reporters.
The settlement comes at a good time for Merck, which has seen its shares nearly double over the past two years as the company benefits from its strong vaccine business. Merck shares continued the gains Friday, jumping $2.07, or 3.8%, to $56.84.
Merck said the course of the Vioxx litigation played an important role in settling. In more than a dozen trials a majority of which Merck has won – no clean formula has emerged for proving whether Vioxx caused individual heart attacks and strokes.
"There’s no prospect that’s going to change," Bruce Kuhlik, Merck’s current general counsel, said in an interview.
That lack of a clear formula for causation presented uncertainty for both sides.
"There are a number of causes of heart attacks and strokes, so that makes it challenging for plaintiffs to
prevail," Andy Birchfield, plaintiffs attorney in several federal Vioxx trials, said in an interview. "What we’ve seen in the course of the trials is that plaintiffs were prevailing in less than half of those cases."
On the other hand, when juries did conclude that Vioxx caused heart attacks, they rendered some big awards, most notably the $253 million awarded in the very first Vioxx trial in Texas. Thus, the lack of a clear causation formula presented a continuing risk for Merck as well.
Statutes Of Limitation
Another factor in the timing was that Merck now has greater certainty about the total number of lawsuits it can expect to be filed over Vioxx. About 42 out of 50 U.S. states have statutes of limitation of three years. Given that Merck withdrew Vioxx from the market in September 2004 after a study showed it elevated risk of cardiovascular events, those deadlines have now expired, making it much more difficult for new cases to be brought. About 26,600 lawsuits comprising 47,000 plaintiff groups had been filed by Sept. 30. In addition, about 14,100 claimants had entered agreements with Merck that essentially waived the statutes of limitation in federal court.
"Today, what we think we can say with substantial certainty is the time for filing claims for people in all but a handful of states has run out," Frazier said in an interview. "We believe we’re dealing with a reasonably known universe of claims."
In total, of roughly 60,000 claimants, Merck expects about 45,000 to 50,000 of these to qualify for payments in the settlement. Those who qualify must have suffered a heart attack or "ischemic" stroke and meet other criteria, such as having taken at least 30 Vioxx pills and having suffered the injury within 14 days of taking the drug. Claimants don’t have to give definitive proof that Vioxx caused their injuries. Some of the remaining cases involve other alleged injuries, such as kidney failure. Merck plans to defend itself against the remaining cases and believes the hurdle will be high for plaintiffs to prevail.
The settlement goes into effect if certain conditions are met by March 1, such as the agreed participation by at least 85% of pending heart attack, stroke and death claims; and 85% of claims alleging more than 12 months of use. Payments would begin as early as August 2008. Merck will take a charge of $4.85 billion in the fourth quarter of this year to cover the settlement.
"This is a good and responsible agreement that is structured to provide a significant degree of certainty
towards resolving a majority of Vioxx claims in the U.S.," Merck Chief Executive Richard Clark said on the conference call.
Although Merck has won more Vioxx cases than it lost at trial, the company didn’t like the idea of continuing to spend big bucks on case-by-case litigation over many years. Kuhlik said Merck was "absolutely" concerned about having to add millions of dollars to its defense reserve every couple of quarters.
In Better Shape
Another potential factor in the timing of the Vioxx settlement is that Merck is in much better shape than it was immediately after Vioxx’s withdrawal. Sales and profits are up because Merck has cut costs and come out with several new products, including the blockbuster cervical cancer vaccine Gardasil. Although Merck executives insisted Friday that the company had sufficient resources a few years ago to fight each case, its subsequent business success hasn’t hurt.
The settlement is "completely manageable for the company," Deutsche Bank analyst Barbara Ryan said in a research note. She noted Merck has about $5.4 billion in net cash and generates about $3.6 billion in annual free cash flow.
"We believe the company’s aggressive and successful defense strategy has given it a heavy hand in the bargaining process and produced a favorable outcome in the Vioxx settlement, at a cost that is clearly at the low end of general expectations," Ryan said. Indeed, some analysts had predicted Merck’s ultimate Vioxx liability would be in the tens of billions of dollars.
Lehman Brothers analyst Tony Butler believes the proposed settlement will remove a distraction for Merck employees. Especially for senior management, the litigation was a "major distraction," he said.
"They have to talk about it, strategize and allocate capital for it. The sooner it’s over, the better they can do their jobs."
It’s true that the settlement won’t end all of the Vioxx litigation. Drug makers Wyeth (WE) and Eli Lilly & Co.
(LLY) have learned that partial settlements don’t close the door on future costs. In 1999, Wyeth reached a $3.75 billion class-action settlement to resolve litigation over its former diet drugs – including half of the popular "fen-phen" combination -which caused heart- valve damage. But Wyeth’s ultimate costs have ballooned to more than $21 billion because some people opted out of the settlement and continued with litigation.
Merck executives, however, said the Vioxx settlement is different from fen- phen and is unlikely to lead to spiraling liability. For one thing, it’s not a class-action settlement that people can opt out of. The proposed Merck settlement only goes into effect when the 85% thresholds are met, said Kuhlik. Also, plaintiff lawyers have agreed to bring 100% of their cases into the settlement and not hold any back.