Merck Wins! (Not That it Matters)

Yesterday morning pharma giant Merck won the second Vioxx case to go to trial. The case cleared Merck of responsibility for a heart attack suffered by an overweight postal worker who had taken Vioxx for only two months. The verdict spurred a rally in Merck stock on Thursday.

The biggest issue facing Merck shareholders right now is the unknown liability that will result from Vioxx litigation. Most analysts have a liability between $30 and $50 billion baked into their estimates. Merck currently has 6,400 Vioxx lawsuits pending against it representing 11,700 plaintiff. That means that a $30 billion liability assumes that Merck loses every case against it and pays defendants about $2.5 million apiece, a $50 billion liability assumes they pay about $4.27 million each, Merck has a separate reserve to pay their attorneys.

The size of the liability is a huge deal, Merck will end up paying the widow of a marathon running produce manager $24 million after a Texas jury found that he died as a result of taking Vioxx, they won't pay this week's plaintiff anything. Estimates of actual deaths caused by Vioxx vary, and may include people who died while taking Vioxx but whose deaths were not caused by Vioxx. Merck certainly faces a huge liability, and a liability that may people believe they deserve to pay due to their lack of caution in promoting Vioxx.

For Merck shareholders the Vioxx liability remains the biggest question mark, followed closely by the 2006 loss of patent protection for cholesterol mega drug Zocor. But even with all of the bad news that will certainly hit Merck in the next year, the market may still be taking too dim a view of Merck's future prospects. Even after Thursday's rally, Merck is still priced at only 11 times earnings, and still has thousands of scientists searching for new drugs and vaccines every day.

Timothy Burger
timothyb(at)timothyburger.com