Product News and Recalls

Merck Wins Battle, Faces War

Matthew Herper and Robert Langreth, 11.03.05, 1:42 PM ET

Merck won a significant decision in a Vioxx lawsuit, emerging victorious on all counts in the New Jersey case of a postal worker and Vietnam veteran who said that two months of Vioxx use caused his heart attack.

“This vindicates that we acted in the right way,” said Kenneth C. Frazer, Merck’s top lawyer, on a conference call with reporters.

“This is a critical victory for Merck,” says Howard Erichson, a professor of law at Seton Hall Law School in New Jersey. “It doesn’t end the litigation, but it takes the pressure off of them to start settling some cases right away.”

But both stock analysts and lawyers cautioned that the win does not necessarily represent a turning point for Merck, which still faces more than 6,400 more Vioxx cases that could stretch on for years and cost billions of dollars. It still may be impossible to estimate exactly how big (or small) the eventual cost to the drugmaker will be.

“I’m sad for the Humestons,” says Chris Seeger Weiss, the plaintiff attorney in the New Jersey case. “But Merck would be making a huge mistake if they somehow think this is going to discourage any of the plaintiffs lawyers from pressing forward with cases.”

Plaintiffs allege that Merck did not move quickly enough to recognize the risks of the popular arthritis drug, which at one time brought in annual sales of $2.5 billion. Merck pulled the pill from the market in September 2004, after its own study showed that Vioxx doubled the risk of heart attacks and strokes in patients who took the drug for 18 months or more. The withdrawal ignited a firestorm of controversy about the safety of other drugs, like Celebrex and Bextra, from Pfizer.

“One case doesn’t tell us much,” says Carl Tobias, who teaches product liability law at the University of Richmond. The venue, the fact that Merck was fighting in its home state where it employs thousands of people and the particulars of the case all could have affected the decision.

“I continue to think that it’s a marathon,” says Barbara Ryan, an analyst at Deutsche Bank who rates Merck a “hold.” “I think it seemed like, on the merits of this case, they should win. If they couldn’t win this case, there was a dismal outlook.”

Still, Ryan said, winning the case–especially on all counts–was a “shot in the arm,” especially after the decisive loss that Merck suffered in Angleton, Texas, in August, when a jury found the drug giant liable on all counts and awarded the widow of a marathon runner a sum of $253 million. (The award is expected to be reduced considerably to about $26 million.)

Some analysts see value in Merck, which has put in place new Chief Executive Richard Clark since the Vioxx crisis. “It’s early days, but Merck is taking the long view,” says Robert Hazlett, an analyst at SunTrust Robinson Humphrey, who has a “buy” rating on Merck stock.

The drug giant will face both victories and losses in court, Hazlett says, and that will make shares volatile. But victories, he argues, will allow investors to once again focus on promising experimental medicines, like Gardasil, a vaccine to prevent cervical cancer, and a new diabetes pill.

Analysts and legal experts were somewhat unsure of why the jury in New Jersey decided as it did. But one big factor may be that Frederick Humeston, the Boise, Idaho, postal worker who was the plaintiff in the case, was only on Vioxx for a short period of time. Merck has argued that Vioxx’s risks probably only emerged after long-term use. In court, Merck’s attorneys were often chided by the judge in the case, Carol Higbee. The University of Richmond’s Tobias says he was surprised that didn’t affect the jury negatively.

Plaintiff lawyer James McHugh of the Beasley firm in Philadelphia has 500 Vioxx cases filed. He says that “Merck used dirty tactics without a doubt” during this trial, which will be grounds for appeal. “It just shows that desperate companies do desperate things.”

But Merck won on all counts, even those related to whether it mismarketed Vioxx. That, says Erichson, is a big plus. He says that the biggest possible upside for the embattled drugmaker will be if this prevents plaintiffs lawyers from bringing weak cases.

Still, the uncertainty is considerable. Estimates for Merck’s eventual liability range from a very manageable few billion dollars to a whopping $50 billion. “This is not a knowable number,” says Deutsche Bank’s Ryan. She points to Wyeth, which has battled liability for a pair of withdrawn diet drugs for nine years. “I think it’s not quantifiable,” she says.