Vioxx Verdict Begs Questions

Analysts wonder how Merck will fare in future litigation.
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defenders and detractors were in familiar territory Thursday, with both camps trying to figure out if the split verdict in the latest Vioxx case tips the scales one way or the other for future litigation.

On Wednesday, a New Jersey jury said the arthritis drug Vioxx contributed to the heart attack of a 77-year old man, John McDarby, and ordered Merck to pay him and his wife $4.5 million in compensatory damages.

At the same time, the jurors ruled that Vioxx didn't play a significant role in the heart attack of Thomas Cona, 60. They awarded him just $45 to cover the cost of his medication.

Merck's stock was losing $1.70, or 4.7%, to $34.29, as analysts tried to determine the impact of the McDarby verdict on more than 9,600 U.S. personal injury cases filed against the Whitehouse Station, N.J., drugmaker.

Analysts said the decision wasn't good news for Merck, but they added that they need to see more verdicts before deciding if a trend is developing. In other words, the latest case isn't the first time Wall Street finds itself struggling to predict what later juries will say about Vioxx, and it probably won't be the last. Thus far, Merck has lost two personal injury cases and won three.

"Merck's Achilles' heel appears to be its failure to adequately warn on cardiovascular risk," says a research report from analyst John Boris of Bear Stearns. Boris, who has a peer-perform rating on Merck, was referring to the jurors' vote that the company violated New Jersey's consumer fraud law by failing to inform McDarby and Cona about Vioxx's risks.

Jurors reconvened Thursday

for the punitive damages phase of the trial relating to the consumer fraud verdict. Under state law, McDarby and his wife could receive up to $22.5 million because punitive damages are capped at five times the amount of compensatory damages. Both Cona and McDarby could be awarded attorneys' fees and costs.

Merck withdrew Vioxx from the market in September 2004, citing a clinical trial that showed people who took Vioxx for more than 18 months had a higher cardiovascular risk than people who received a placebo.

McDarby, who's in a wheelchair, is the first victorious plaintiff who took the drug for more than 18 months. He said he used Vioxx for four years. Cona said he took Vioxx for 22 months, but Merck's attorneys disputed his claim. Merck argued that both Cona and especially McDarby, who has diabetes, had several risk factors that caused their heart attacks.

Merck lost a case in a Texas state court in August to the widow of a 59-year old man who took Vioxx for eight months and who died of a heart attack. Merck is appealing the verdict. Merck said it won't comment on the McDarby case until the punitive damages ruling has been made.

The McDarby and Cona verdicts don't reduce the uncertainty over the long-term cost of Vioxx lawsuits. "Product liability exposure is difficult to predict with a high degree of accuracy," says Boris, who predicts Merck could be tagged with $10 billion in lawsuit losses. He doesn't own shares, but his firm has had a noninvestment banking relationship with the company.

Analyst David Moskowitz predicts the McDarby verdict will encourage more lawsuits. "While the consumer fraud verdicts may not result in large awards, we believe they may be significant given the

large class-action litigation pending on behalf of health insurers," Moskowitz, of Friedman Billings & Ramsey, wrote in a research note.

Moskowitz, who doesn't own shares, has an underperform rating on Merck. His firm says it does or seeks to do business with companies covered in its research reports.

A slightly more positive view comes from Chris Shibutani of JPMorgan, who told clients that he still believes "Merck has the stronger case when it comes to causation

of cardiovascular damage and even adequacy of warning." Shibutani, who is neutral on Merck, says "it will take more verdicts to tell whether trying every case individually is sustainable."

Merck has repeatedly vowed to do just that, saying it doesn't plan a large-scale settlement and that it will fight each lawsuit on an individual basis.

Shibutani, who doesn't own shares, says the McDarby and Cona cases suggest that "the marketing story is probably driving more verdicts than the science." His firm has had a recent investment banking relationship with Merck.