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Updated from 8:27 a.m. EST


(MRK) - Get Merck & Company Inc. Report

said Friday morning that it will settle the Vioxx product liability lawsuits filed against it in the U.S. for $4.85 billion. In reaction, shares were rising $2.75, or 5%, to $57.52 in recent trading.

The company will pay the fixed amount into two settlement funds for qualifying claims that enter the resolution process -- $4 billion into a fund for heart attack claims and $850 million for ischemic stroke claims. Merck pulled Vioxx from the market in the fall of 2004 after a study revealed increased rates of heart attack and stroke in patients being treated with the arthritis-pain drug.

Ben Zipursky, a Fordham Law School professor and an expert in product liability law, noted that despite it being a big settlement, it's far less than many estimates of potential liability and the savings on litigation alone are significant. But Zipursky also speculated, "It remains an open question whether it will ultimately be approved, because Merck and the plaintiffs' lawyers will almost certainly be subjected to strong attacks by third parties intervening to challenge the agreement."

As of Oct. 9, Merck was a defendant in some 26,600 Vioxx-related lawsuits, which included about 47,000 plaintiff groups, alleging personal injuries resulting from the use of the drug. The company had also been named in roughly 264 suits seeking class-action status.

Merck had long said it would fight each case individually, so the settlement comes as something of a surprise. In the cases that have gone to trial and been decided thus far, juries have sided with Merck 12 times and in plaintiffs' favor five times.

One Merck verdict was set aside by the court and has not been retried. Another Merck verdict was set aside and retried, leading to one of the five plaintiff verdicts. There have been two unresolved mistrials.

Merck's defense record thus far in the Vioxx litigation may be why the drugmaker was able to negotiate to a much lower-than-speculated number, and thus decided to settle.

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Settlement Details

The settlement offer is open only to cases filed on or before Nov. 8. Merck does have the right to terminate the process without any payment to any claimant and to defend each claim individually at trial if any of the participation conditions in the agreement aren't met. The deal isn't a class-action settlement, and claims will be evaluated on an individual basis.

The settlement becomes binding only if 85% of all plaintiffs agree to drop their cases, Merck said.

In addition to other stipulations, in order to qualify a claimant has to have medical proof of a heart attack or stroke, documented receipt of at least 30 Vioxx pills, and he or she has to be presumed to have taken the drug within 14 days of having a medical problem.

The company said in a conference call following the announcement Friday that each patient case will be assigned points based on risk factors, duration on the drug and consistency of taking the drug among other things. The money will then be distributed based on that assessment. But regardless of how patients fit into those categories, no more than the $4.85 billion will be distributed.

Merck said no one who's eligible can exit the process or opt out and return to court, the payment is only triggered if the aforementioned 85% or more of all plaintiffs enter and firms must recommend enrollment to 100% of their clients who allege heart attack or stroke in relation to Vioxx.

"We have done everything humanly possible to ensure that it actually resolves the vast majority of myocardial infarction and ischemic stroke cases, to close the doors to new filings and to guard against fraud," said General Counsel Bruce Kuhlik.

Payment to individual claimants could start as early as next August. Merck said it expects to record a fourth-quarter pretax charge of $4.85 billion to cover the cost of the agreement. The company expects the charge will be tax deductible.

Natixis Bleichroeder analyst Jon LeCroy said he expects the payment to reduce interest income by about $200 million a year going forward. Also updating his predictions for Merck's Gardasil, he noted, "For 2007 and 2008, interest income losses offset the vaccine increases, leading to lower EPS estimates. For 2009-2011, however, the vaccine increases more than offset lower interest income and EPS increase."

LeCroy has a buy rating and is now looking for 2007 EPS of $3.15, a penny lower than his previous estimate, and $3.46, $3.79 and $4.26 in '08, '09 and '10, respectively. Prior estimates were for $3.50, $3.74 and $4.21 for 2008-2010.

For Trotta's video take on Merck's Vioxx settlement, click here