Vioxx Verdict Casts Long Shadow over Merck’s Future

posted on:
August 19, 2005

author:
Deena Beasley

 Merck & Co. Inc. could face years of litigation and billions in damages, putting its stock price under pressure after a Texas jury found the company liable in the death of a man taking its painkiller Vioxx. 

John LeCroy, an analyst at Natexis Bleichroeder, called the Vioxx litigation a “ten- to 20-year problem” for the company, which has so far had more than 4,200 similar lawsuits filed against it.

“I had thought this would cost them around $4 billion, but now I don’t think $10 billion is an unreasonable number,” he said.

The first verdict in a personal-injury case over the drug sent the company’s stock down $2.35, or 7.7 percent, to close at $28.06 on the New York Stock Exchange.

A 12-member jury in Texas state court on Friday awarded a $24 million penalty to Carol Ernst, the widow of Robert Ernst, for mental anguish and loss of companionship and $229 million in punitive damages.

A Texas law limiting punitive damages is expected to reduce that $229 million award.

“This is obviously not a positive development for Merck, but most investors expected a negative ruling,” said Shaojing Tong, an analyst at Mehta Partners. He put Merck’s likely total damages at around $5 billion.

“The fact that Merck lost, and that the award was sizable, will likely energize the plaintiff’s bar and will increase the frequency at which the company gets sued,” Prudential Equity Group analyst Tim Anderson said in a report.

Lawyers said the ruling bodes well for plaintiffs.

“This was a conservative jury which makes this verdict more significant,” said Jere Beasley, with the Montgomery, Alabama, law firm of Beasley, Allen, Crow, Methvin, Portis & Miles, which is investigating some 10,000 cases of Vioxx patients who suffered heart attacks or stroke.

“Merck claimed this was a weak case … It is clear that the jury was upset,” said Mitchell Breit, an attorney at Milberg Weiss in New York.

Merck, which pulled Vioxx off the market last September after it was linked to heart attack and stroke when taken for at least 18 months, said it planned to appeal the verdict.

Merck had argued that Ernest died of an irregular heartbeat—a condition not linked to Vioxx.

“Had they won, the upside would be significantly greater than the downside we’re seeing …,” said Brett Gallagher, a senior portfolio manager at Julius Baer who bought Merck shares after the downdraft and believes the stock is undervalued.

“It probably was the most expected outcome, and now unfortunately the uncertainty drags on,” he said.

David Dreman, who held at least 154,000 shares of Merck as of June 30, said Merck was a very strong company and “has the financial staying power to ride this out”.

“They’re going to be in court for a long time. I don’t think this is going to be a crippling blow to the company,” he said.

Others said Thursday’s verdict raises questions about Merck’s stated strategy of trying every Vioxx case. “Maybe this means that they selectively settle some cases,” LeCroy said.

Susan Dwyer, head of the product liability defense group at New York law firm Herrick, Feinstein said Merck fought “tooth and nail” in the courtroom, but still did not fare well. “There were a lot of bad documents, they started off poorly with their witnesses, company witnesses did not do well on the stand. I think they’ll be more polished next time,” she said.

Nevertheless, Merck’s strategy of trying every case will probably be revisited, she said.

LeCroy said litigation is “part and parcel of doing business now for a pharmaceutical company,” noting that lawsuits over the diet drug combo fen-phen—which was linked to heart valve damage—have so far cost Wyeth more than $21 billion.

Juries have awarded big sums to some fen-phen claimants, including a $1 billion judgment last year to the family of a Texas woman who died from a serious lung impairment. The state court jury in Beaumont deliberated six days before delivering the biggest fen-phen award to date, which includes $113 million in compensatory damages and $900 million in punitive charges.

Although Wyeth appealed that and other awards, each court defeat gives encouragement to other fen-phen plaintiffs whose cases have not yet gone to trial.

“There will be thousands more (Vioxx) cases filed,” Milberg Weiss’ Breit said.

The next trial is set to start Sept. 12 in New Jersey. It involves a postal worker who claims he suffered a heart attack two months after he began taking Vioxx.

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