Merck & Co. began defending the first of more than 3,500 state and federal lawsuits over its once popular arthritis drug Vioxx in a south Texas courtroom Thursday—enacting a case-by-case strategy analysts expect will limit what the company might have to pay.

In Texas, the family of Robert Ernst alleges the drug caused Ernst’s heart arrhythmia, or irregular heartbeat, and led to his death in 2001 after about eight months on the drug. Merck pulled Vioxx from the market Sept. 30 after a study showed increased risks of heart attack and stroke.

Because an estimated 20 million people worldwide took Vioxx, some analysts believe future settlements by Merck could be one of the drug industry’s most expensive product liabilities in history.

The controversy has already led to stricter warning labels for some of the nation’s best known pain pills and the possibility of legislation to enhance government oversight of drugs once on the market.

Merck has vowed to fight this and every future case on an individual basis, hoping to avoid a massive settlement that a likely large class action of patients might bring.

It’s a strategy industry analysts say may help Merck avoid the huge payout brought on by another high-profile prescription liability case: the diet pill debacle known as fen-phen. The pill combination was linked to heart valve damage and subsequently yanked from pharmacy shelves in 1997.

New Jersey-based drug giant Wyeth finalized a global settlement in October 1999, two months after losing one high-profile trial. And the meter is still running.

So far, Wyeth has set aside more than $21 billion for settlements and related legal costs after adding $4.5 billion to its reserve last year. A Wyeth spokesman said they expect the additional reserve is “our best estimate to cover all future costs.”

With industry analysts putting Merck’s liability at anywhere from $4 billion to $30 billion, they see the company benefiting by fighting, or at least dragging out the litigation as long as possible.

Wyeth scenario feared

“The industry watches large class actions-type lawsuits because you wonder if it is ever going to become a Wyeth scenario where the costs could balloon out of control,” says Michael Zbinovec, director of corporate finance and a pharmaceutical analyst for Fitch Ratings in Chicago.

“Costs from the fen-phen litigation are over $21.1 billion as far as the reserve, and I think the pharmaceutical industry learned from that. That is real money,” he said.

The size of potential payouts is not lost on Merck, analysts say.

“We intend to defend these cases individually over many years,” said Kenneth Frazier, senior vice president and general counsel at Merck. “Merck acted responsibly to voluntarily withdrawing the medicine when it did.”

By taking the cases on one-by-one, Merck could mitigate their damages, particularly since the causes of heart attacks or strokes are myriad.

“If the strategy is working, keep it up and if they start losing they can then propose a global settlement,” said Winton Gibbons, a pharmaceutical industry analyst with William Blair & Co. in Chicago.

In the fen-phen case, valve damage linked to patients who took the diet drug occurred in a more limited population of obese patients, predominantly women.

“The direct link to Vioxx is convoluted by the fact that cardiovascular events are so prevalent in the general population,” Zbinovec said.

Vioxx patients also tend to be older and have other illnesses like diabetes, obesity and high blood pressure, so linking the drug directly to patient death may be difficult.

“The legal system only has the capacity to handle so many cases on an annual basis,” Zbinovec said.

“It definitely does not allow for these huge spikes and payouts from the company on an annual basis,” he said.

The drug also remains popular among patients who held onto their pills long after the company pulled it from the market. One prospective juror in the Texas case who was not chosen called Vioxx “a wonder drug.”

In the Texas case, Ernst was a 59-year-old personal trainer who was taking Vioxx for tendinitis, the plaintiff’s lawyer has said. The lawyer, Mark Lanier, is expected to present evidence in e-mails and internal documents that Merck sold Vioxx despite knowing it posed risks long before the company pulled it from the market.

Internal memos

What should be most worrisome for Merck, analysts say, is that the jury might believe the company covered up problems. A smoking gun introduced at trial could be devastating, analysts say, particularly if plaintiffs’ lawyers prove the company intentionally ignored Vioxx safety issues in favor of making money.

Vioxx was launched in 1999 and generated more than $2 billion in annual sales before it was taken off the market.

“There is a lot of bravado in this company, but their internal memos [that have come out in the press] indicate they are quite frightened,” said Dr. Sidney Wolfe, director of Public Citizen’s health research group. “In terms of the stuff of which punitive damages are made, they are in big trouble.”

But even a drug industry critic like Wolfe says Merck may be able to defend the Texas case because Ernst had arrhythmia rather than a heart attack or stroke.

“They picked the case they are more likely to win,” Wolfe said.

“It would be different if the guy had a regular heart attack or stroke. If they had a 30- or 40-year-old person who was in good health who had a heart attack or stroke, I do not think they will fight those types of cases,” he said.

Weighing in Merck’s favor is mounting evidence from government regulators and medical experts showing Vioxx’s benefits outweigh the risks.

In February an FDA advisory panel said Vioxx’s benefits outweighed its risks, but the drug was only two votes from being recommended for a ban. During the advisory panel hearings, Merck made a blockbuster announcement that it was not ruling out bringing Vioxx back on the market.

In part because Merck voluntarily withdrew the drug the FDA did not follow through with a ban on the product, giving the company even more of a defense, industry analysts say.

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