Merck's legal liability on Vioxx may hit $10 billion, analyst says

Estimate assumes 48,000 U.S. patients will file suit

August 23, 2005|By BLOOMBERG NEWS

NEW YORK - Merck & Co.'s legal liability for the withdrawn pain pill Vioxx may be as much as $10 billion, twice as high as previously estimated after the drug company lost the first of thousands of lawsuits, an analyst said yesterday.

Credit Suisse First Boston analyst Catherine Arnold in New York doubled her liability estimate to $10 billion after the verdict, she said yesterday. The new total is based on an assumption that 48,000 U.S. patients will sue and may win payments averaging $200,000 each.

"We think our liability estimates are reasonable," Arnold said in a telephone interview. "There is a lot of imprecision in knowing what the ultimate value will be in something that will take eight to 10 years to resolve."

Merck, the third-largest U.S. drugmaker, may have to add to the $675 million it set aside for Vioxx-related legal costs, investors and lawyers said after a Texas jury issued its $253 million verdict Friday. Other analysts' estimates ranged as high as $25 billion, while some said it is too early to determine total liability.

The company was ordered to pay $24.4 million in actual damages and $229 million in punitive damages to the family of Robert Ernst, a 59-year-old marathoner who died in 2001 after taking Vioxx for eight months. Merck may ultimately be liable for 10 percent of that amount because of a state cap on punitive damages.

Appealing Texas case

"The result in the Ernst trial does not provide a basis for the re-evaluation of reserves established for legal defense costs," Merck spokeswoman Jeanine Clemente said yesterday in an e-mailed statement. Merck is appealing the Texas case and said it plans to stick to its strategy of defending each case.

Merck's shares fell 17 cents to close at $27.89 yesterday on the New York Stock Exchange. They dropped 7.7 percent to a six-month low on the day of the verdict, shaving $5.2 billion from Merck's market value.

Merck's stock has lost 38 percent of its value since Vioxx was pulled from the market in September.

"Absent more concrete assumptions, we can only provide a wide range of potential liability, between $8 billion to $25 billion," Chris Shibutani, analyst at JPMorgan Securities in New York, wrote in a note to clients yesterday.

"Merck has fundamental challenges ahead based on its base business," Arnold said. "Considering Friday's fall, we really concluded [that] the stock is trading incorporating these items. We think the downside risk here is modest."

Vioxx was introduced May 1999 and used by about 20 million people in the United States. Merck withdrew it from the market last year after studies showed that the pill may cause heart attacks and strokes. Government regulators estimated during Senate hearings in November that the drug hurt or killed as many as 139,000 people.

Next trial Sept. 12

In the next three months, Merck is scheduled to face at least three more trials of lawsuits that allege Vioxx caused heart ailments in users. The next court battle is set to start Sept. 12, in Atlantic City, N.J.

Losing the first case may put pressure on the company to settle 4,000 similar lawsuits as well as future claims as it prepares for the Atlantic City case.

A New Orleans judge overseeing Vioxx cases in federal court there estimated in May that Merck may have to defend more than 100,000 such suits. Merck's Vioxx liability may exceed $30 billion, said Richard Evans, an analyst at Sanford C. Bernstein & Co. in New York.

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