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Merck’s $4.85 Billion Vioxx Settlement Could Set Industry Standard To Resolve Litigation

This article was originally published in The Pink Sheet Daily

Executive Summary

Agreement to resolve the bulk of Vioxx litigation guards against Merck's future liability, an analyst tells "The Pink Sheet" DAILY.

Merck's Nov. 9 agreement with law firms in the plaintiffs' steering committee for federal multidistrict Vioxx (rofecoxib) litigation requires extensive documentation of injuries by the plaintiffs and a critical mass of 85 percent of claimants to enroll in the settlement process.

The pact covers 45,000 to 50,000 claims for myocardial infarction and ischemic stroke of the 60,000 total claims against Merck in the U.S. Approximately 300 claims for damages for the COX-2 inhibitor involving about 800 plaintiffs groups have been brought to courts outside the country.

Merck expects to take a pre-tax charge of $4.85 billion in the fourth quarter of 2007 to cover the cost of the agreement. Payments will be paid out over two years with the first expected in August 2008. Merck will create separate funds of $4 billion for MI claims and $850 million for ischemic stroke claims. The firm had reserved $1.9 billion since 2004 to defend the litigation.

Investors were upbeat about the agreement. "It sets a standard for the industry that has historically been brought to its knees" by product liability litigation, Morgan Stanley analyst Jami Rubin told "The Pink Sheet" DAILY. She said the settlement is structured in such a way that Merck is guarded against future liability.

At one point, Rubin said, investors projected that Merck faced $15 billion to $30 billion in liability. The agreement "makes this issue go away at a reasonable cost," she said.

In a same-day conference call with investors, company executives emphasized that the settlement is part of Merck's defense strategy.

"This is the right agreement at the right time," Merck general counsel Bruce Kuhlik said during the call. He noted that Merck has won the majority of cases that have gone to trial, the statute of limitations has run out in many states, and that judges have issued orders requiring non-eligible or non-participating plaintiffs to provide documentation of the factual basis of their claims.

CEO Richard Clark said Merck would continue to defend itself against cases that lack a scientific basis. "We don't intend to make a statement that we will pay for anyone who ingested Vioxx."

Merck voluntarily withdrew Vioxx from the market in 2004 after the data safety monitoring board overseeing a long-term study of the painkiller recommended the trial be halted because of an increased risk of cardiovascular events, including heart attacks and strokes, in study patients taking Vioxx (1 ).

Approximately 26,600 lawsuits have been filed against Merck in the United States. Eighteen cases have gone to trial with juries ruling in favor of Merck 12 times (one of these verdicts was set aside and retried with a ruling in favor of plaintiffs) and in favor of plaintiffs five times. Two cases resulted in mistrials.

Seven cases now pending against Merck are excluded from the agreement so the parties can pursue an appeal. The company executives asserted that they would continue to defend all claims that are not included in the settlement.

"We looked at the structure of other agreements and tried to take the best [of some] and avoid the pitfalls of others," Fitzpatrick said.

The most important lessons learned by the firm, he added, was the need to make certain that claimants are qualified to participate in the agreement and to assure that they could not opt out of the deal later and go back to court.

The structure of the agreement is unique, particularly the level of individual evaluation of claimants and the participation required to trigger Merck's payments, Merck's outside counsel James Fitzpatrick, Hughes Hubbard & Reed, told "The Pink Sheet" DAILY.

To qualify, claimants have to pass through three gates: an injury gate requiring objective, medical proof of MI or ischemic stroke; a duration gate based on documented receipt of at least 30 Vioxx pills; and a proximity gate requiring receipt of pills in sufficient number and proximity to the event to support a presumption that Vioxx was ingested within 14 days before the claimed injury.

Claimants are assigned points based on the duration and continuation of Vioxx use, their age, time period they took the medication and their individual medical risk factors. The more risk factors and the shorter the duration of use, the fewer points an individual will receive.

The agreement lays out several conditions for payment. No one eligible to enter the settlement process and deemed to receive payment can opt out and pursue court action. Payments are triggered only if 85 percent or more of all currently pending and tolled MI claims, ischemic stroke claims, eligible claims involving a death and eligible claims alleging more than 12 months of use enroll in the settlement process.

Law firms on the federal and state plaintiffs' steering committees and those who tried cases in the coordinated proceedings must recommend enrollment in the settlement program to all of their clients who allege either MI or ischemic stroke.

While the $4.85 billion settlement is significant, it pales in comparison to the $21.1 billion Wyeth earmarked to settle fen-phen diet drug litigation. Fenfluramine drugs were withdrawn from the market in 1997 after they were linked to heart valve disease.

More recently, Lilly set aside $1.2 billion to settle claims that its antipsychotic Zyprexa labeling did not adequately warn of the risk of diabetes (2 (Also see "Lilly To Pay Up To $500 Million In Second Zyprexa Settlement" - Pink Sheet, 4 Jan, 2007.)).

But Fitzpatrick said it is not useful to compare Vioxx to other product liability litigation because the cases involve different types of injuries. The type of injuries alleged with Vioxx - myocardial infarction and ischemic stroke - occur at a specific time and the agreement requires objective documentation to show that a claimant experienced those injuries, Kuhlik noted during the call.

In the case of fen-phen, heart valve problems could be diagnosed well after the fact and thus the pool of claimants expanded over time, he said.

-Brenda Sandburg ([email protected])

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