Take Merck, Pfizer on a Strong Stomach

Having had time to assess the changing landscape for Cox-2 arthritis drugs, Wall Street analysts appear glad to accept lower sales in return for lower legal risks at Merck(MRK Quote) and Pfizer(PFE Quote).

The big question: Will Friday's news change the legal climate surrounding these drugs, especially Merck's Vioxx? There's still a long medical, legal and political path between the advisory committees' votes last week -- endorsing Vioxx and Pfizer's Celebrex and Bextra -- and the Food and Drug Administration's final decision.

The agency doesn't always follow the recommendations of its advisory panels, and the close votes on Vioxx (17-15) and Bextra (17-13 with two abstentions) certainly raise questions among investors as well as doctors and patients. Celebrex was supported by a 31-1 vote.

"We believe the key benefit to Merck is not necessarily generating incremental sales but potentially limiting legal liability," said David R. Risinger of Merrill Lynch, in a report to clients.

Merck voluntarily withdrew Vioxx from the market on Sept. 30, saying that research showed a higher cardiovascular risk among patients taking the drug for more than 18 months vs. patients receiving a placebo.

If the FDA approves a return of Vioxx even with a host of restrictions, "this could be an effective response to trial lawyers who have argued that Vioxx should not have been on the market in the first place," said Risinger, who has neutral ratings on Merck and Pfizer.

Favorable FDA action plus the enactment of recent changes in tort law "suggests to us that our previously published $4 billion to $18 billion range can come down," said Risinger. (He doesn't own shares; his firm says it "does and seeks to do business" with companies mentioned in research reports.)

Although Pfizer is being sued over Celebrex and Bextra, the heaviest litigation involves Merck and Vioxx. As of Dec. 31, the company had counted 575 lawsuits alleging personal injuries caused by the arthritis drug. Merck also has been named as defendant in some 70 class-action suits relating to personal injury claims. It has been named as a defendant in 30 lawsuits involving claims of violations of federal securities laws and laws governing employee retirement plans. Merck also is defending Vioxx suits filed in several other countries.

A Discouraging Word

However, there's no sigh of relief on the legal front for Richard T. Evans of Sanford C. Bernstein & Co., one of the most bearish pharmaceutical industry analysts when it comes to predicting Cox-2 liabilities.

Late last year, Evans threw out his original prediction of $12 billion in litigation expenses, saying Merck's legal bill could go as high as $38 billion. If plaintiffs could prove negligence, Merck's worst-case scenario would be $55 billion, he said.