Updated from 8:27 a.m. ESTMerck ( MRK) 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.
"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.