Merck Legal Team's Killing Losing Vioxx Strategy

Not much has changed at Merck since Vioxx was pulled off the market. The only difference for shareholders is that instead of spending hundreds of millions of dollars a year to promote Vioxx, the attorney's fees are now costing hundreds of millions of dollars a year.

As of December 31, 2004, Merck had established a reserve of $675 million solely for legal defense costs related to Vioxx, according to the company's 2005 annual report.

During 2005, the report said, Merck spent "$285 million in the aggregate in legal defense costs worldwide" related to Vioxx.

In the fourth quarter of 2005, Merck recorded a charge of $295 million to increase the reserve solely for its future legal defense costs related to Vioxx, the report said, to $685 million as of December 31, 2005.

'This reserve is based on certain assumptions," Merck told shareholders, "and is the best estimate of the amount that the Company believes, at this time, it can reasonably estimate will be spent through 2007."

That said, the company has not set aside one dime for potential damage awards in Vioxx trials through 2007. Which means the only good news to report as far as Merck's legal strategy of a case by case defense of thousands of lawsuits in the years ahead, is that the company's legal team will keep raking in dough while Merck slowly goes under.

We now know that tens of thousands of people died, and many more were injured, because Merck concealed the information about the adverse effects of Vioxx. But to date, Merck has not paid one red cent in damages. And the appeals process initiated by Merck attorneys, guarantees that that money awarded to any plaintiff so far will be years away. And even then, experts say, the close to $300 million in damages awarded will be reduced to $48 million by caps on punitive damages.

In addition to the thousands of personal injury and wrongful death claims, Merck also faces class actions, filed on behalf of prescription drug plans and insurance carriers seeking treble damages, that experts say could expose Merck to multi-billion dollar verdicts.

The plaintiffs in the class actions allege that Merck misrepresented the safety profile of Vioxx, ignoring clear and early warning signs of its risks in order to continue its sale, and that had they known the truth, they would not have included Vioxx as an approved drug or agreed to reimburse plan members for its high cost. They also contend that Vioxx was no more effective than over-the-counter painkillers already on the market.

In seeking reimbursement, these plaintiffs will not have to prove that Vioxx caused any injuries or deaths. All they will have to show is that Merck continued to push Vioxx after it knew about the drug's increased risks.

And on top of the class action monsters, there is the pesky little matter of lawsuits filed on behalf of the individual states that also have the potential to expose Merck to billion dollar damage awards. The state actions are similar to the class actions and seek repayment for money paid for Vioxx by state run health care programs like Medicaid.

The damages sought are huge. For instance, Texas Attorney General, Gregg Abbott, is seeking $168 million and says he can prove total damages in excess of $250 million over five years in payments for Vioxx.

According to Merck's 2005 annual report, "The Company has received a Civil Investigative Demand from a group of the Attorneys General of 31 states and the District of Columbia who are investigating whether the Company violated state consumer protection laws when marketing VIOXX. The Company is cooperating with the Attorneys General in responding to the Civil Investigative Demand."

The state of New York's Controller, Alan Hevesi, claims his state's retirement fund lost $171 million when Merck's stock value dropped and that teachers, policemen, and firefighters have lost $287 million all total from their retirement funds.

The NY suit alleges that Merck violated federal securities laws by failing to disclose information about the safety risks of Vioxx. "The New York State Common Retirement Fund is exactly the kind of sophisticated and knowledgeable financial institution that the Congress, in the 1995 Private Securities Litigation Reform Act, intended to lead such class action suits," Mr Hevesi said in a press release.

The NYSCRF is reportedly the second largest public pension fund in the US, in terms of membership and assets, with more than 970,000 retirees, beneficiaries and members and over $120 billion in assets.

"Merck must be held legally responsible for its actions," Mr Hevesi noted in his press release. "These actions have put lives at risk and cost shareholders billions of dollars."

Experts say that for Merck’s “no pay” strategy to work, the company would have to win virtually every one of the of individual lawsuits and then hope that such success would help defeat the claims by state health care programs, and the insurance and healthcare plans. Which they say is absolutely impossible because Merck has already admitted that consumers who used Vioxx over 18 months were exposed to an increased risk.

Billion dollar awards could easily drain Merck’s insurance coverage and punitive damages based on evidence that shows the company withheld, manipulated, and misrepresented the results of clinical studies, and therefore willfully marketed Vioxx, are not covered by insurance and must be paid by Merck directly.

According to attorney, Barry Turner, "Merck may be holding its own at the moment but the fact is that the lying and deceit cannot continue indefinitely without some major blow to stockholder funds."

"I do think that Merck will get burned over this one," he says, "if their lawyers are dumb enough to fight each personal injury case."

Even though insurance does not cover punitive damages, Mr Turner says, "personal injury litigation costs are factored into so called R&D and marketing costs and the end user price covers all of this money."

"But the securities actions are different," he says. "Anyone who thinks this strategy is going to help the stockholders is crazy," he warns.

He predicts that Merck will soon start trying to settle PI cases with confidentiality clauses. "This would mean less payouts," he says, "and less knock on effect as other plaintiffs and their lawyers stand by to watch the action before running their own cases."

The fact is, that in every new trial, the lawyers for the plaintiffs introduce more embarrassing evidence. For instance, in a California trial that began last week, a former Merck employee, testified that the company did not inform federal authorities about two clinical trials in which users of Vioxx were found to be more likely to die than people given a placebo.

Dr Edward Scolnick, the former head of Merck's research laboratories, said in a videotaped deposition played for the jury, that he did not believe the numbers were coincidental. “It's not likely due to chance,” he said.

Dr Scolnick testified that people on Vioxx died at a rate 4 times higher than those who didn't receive the drug in one trial, and the rate was 2½ times higher in the other. Both studies were done in 2001 to see if Vioxx could help Alzheimer patients.

He said Merck did not turn over results to the FDA when company officials met with an FDA representatives in April of that year and that he was not aware of the trial results at the time.

The juries have also viewed internal documents that show Merck training its sales reps to avoid answering tough questions from doctor's about the adverse effects of Vioxx on the heart. In one training manual, each of the last four pages of potential questions that doctors might ask, the manual said "DODGE!" to avoid answering.

In the first trial in Texas, the plaintiff's attorney, Mark Lanier, presented documents showing that Vioxx sales reps at one time received a $ 2,000 bonus if one of the doctors they met with prescribed Vioxx more than 55% of the time, and that the rep was paid another $2,000 if the rate exceeded 61%.

Mr Lanier also showed the jurors a Merck SEC filing that said Merck's CEO Gilmartin was making about $3 million in salary and bonuses in 2000, when the company received the results of the clinical study in which Vioxx users suffered 5 times as many heart attacks as those taking naproxen.

In March 2006, Merck lost a major legal battle that had the company's attorneys kicking and screaming, when US District Judge Eldon Fallon ordered FDA scientist, Dr David Graham to testify in a deposition in response to a subpoena from attorneys for Vioxx plaintiffs.

A major part of Merck's legal strategy has been to continuously point out that Vioxx had been approved by the FDA. Experts say, Dr Graham's testimony will throw a monkey-wrench into that strategy because it will reveal the long-fought battles over the deliberate concealment of the safety risks of Vioxx within the FDA itself.

Judge Fallon said the deposition would be limited to material relevant to the up-coming federal trial in July 2006, and Dr Graham's previous public statements. In the deposition, Dr Graham alleged that Merck dragged its feet about changing the label on Vioxx to warn of the increased risk of heart attacks.

So now in their latest run-up-the-costs tactic, Merck attorneys have filed a motion to limit the use of Dr Graham's deposition claiming it goes beyond anything Dr Graham previously said and therefore portions of it should not be heard by a jury.

Merck's memorandum filed with the motion, asks the court to exclude the following: "The two-year period for coming up with the revised label for a problem as serious as high risk of heart attacks with Vioxx, this is an extraordinary long period of time, and the only explanation based on my long experience at FDA is that there was foot dragging by the company."

But this statement is not new. Dr Graham publicly discussed the failure by Merck and the FDA to warn the public and add a new label to Vioxx while testifying at a congressional hearing a couple years ago on November 18, 2004.

In regard to the death and injuries caused by those failures, he in fact said: "I strongly believe that this should have been, and largely could have been, avoided."

Maybe Merck would rather have the jury listen to how Dr Graham put the number of people injured by Vioxx into perspective, when he told members of the Senate committee that instead of side-effects from Vioxx, to picture the number of people as if it were airline crashes.

"If there were an average of 150 to 200 people on an aircraft," he told the panel, "this range of 88,000 to 138,000 would be the rough equivalent of 500 to 900 aircraft dropping from the sky."

"This translates to 2-4 aircraft every week," he noted, "week in and week out, for the past 5 years."

Merck also does not want the jury to hear Dr Graham say that Vioxx should not have been approved to begin with and that after learning the results of the VIGOR study in 2000, that Merck should have done a large study to determine whether Vioxx damaged the heart or blood vessels; and that an FDA official had recommended "at least" a warning label for the drug.

There is nothing new about these allegations either. Dr Graham made basically the same charges when he told the committee that the FDA "views the pharmaceutical industry it is supposed to regulate as its client, over-values the benefits of the drugs it approves and seriously under-values, disregards and disrespects drug safety."

Dr Graham also pointed out that even when the FDA did try to take measures to limit harm, the agency lacked the enforcement authority to make companies comply. In the case of Vioxx, he said it took more than 2 years to get Merck to add the increased risk of heart attack and stroke to its label.

In their memorandum, Merck attorneys complained because: "Much of Dr. Graham's testimony is an elaboration of why and how he believes the FDA is `broken,'"

"However," they wrote, "Congress (not the jury) is the only body that can address Dr. Graham's concerns."

Well then perhaps Merck should call members of congress to testify at future Vioxx trials to explain how Merck got top FDA officials to protect Vioxx profits by concealing the health risks associated with Vioxx that were revealed in damaging studies as far back as 2000.

In a statement following the verdict in first trial, Senator Grassley was quick to point out the FDA's involvement in the Vioxx disaster. "Those running the nation's public safety agency repeatedly dismissed the concerns of their own scientists and seemed to do everything possible to keep the public in the dark about emerging problems with Vioxx," he said.

"The Food and Drug Administration was also negligent in the Vioxx case," Senator Grassley declared.

A hearing on Merck's motion is scheduled for July 5, 2006, to decide what parts of Dr Graham's deposition will be allowed in during the trial of a suit brought by retired FBI agent, Gerald Barnett, who had a heart attack in September 2002.

Sooner rather than later, the steady stream of multi-million dollar judgments is bound to enrage Merck shareholders who have already suffered massive losses in their investments since October of 2004.

When Vioxx was pulled off the market in September 2004, the drug's $2.5 billion in annual sales equaled 11% of Merck's revenues. When news of the recall broke, Merck shares plunged $12 to $33, wiping out $28 billion of stock value in one day for investors, pension funds and mutual funds.

Stock value dropped another $2.35 per share, or 7.7%, following the first jury's verdict for the plaintiff in Texas on August 19, 2005.

Up until then, analysts had estimated Vioxx liability to be as high as $18 billion. But by the following Monday morning after the verdict, analyst, David Moskowitz, from Friedman, Billings, Ramsey & Co, told CNBC that he had raised his forecast for Merck's total tab from $11 billion to $50 billion.

Critics says, Merck is misleading investors by not making any provision whatsoever for the Vioxx liabilities in financial statements. In its annual report, regarding Vioxx litigation for 2006, Merck said:

"The Company has not established any reserves for any potential liability relating to the VIOXX Litigation. Unfavorable outcomes in the VIOXX Lawsuits or resulting from the VIOXX Investigations could have a material adverse effect on the Company's financial position, liquidity and results of operations."

Overall, there appears to be no good news out there for Merck shareholders. According to the January 27, 2006, Business Week Online, research from Morgan Stanley and Danish investment bank, Jyske Bank, estimates that patent expirations this year will equal 25% of Merck's 2005 sales as major medicines face generic competition.

And in the meantime, more and more angry consumers are saying civil damage awards are not a enough punishment for Merck and that top management people who allowed the Vioxx disaster to happen should be in jail.

Although unbeknownst to most people, criminal charges are being considered that could lead some of the culprits in that direction.

In New Jersey, the $9 million punitive damage award against Merck in April 2006, resulted in the case being referred to the state's Attorney General. Under the New Jersey Punitive Damage Act, any time there is a punitive damage award there must be an investigation "as to whether a criminal act has been committed by the defendant."

By now, there's certainly plenty of evidence in the public domain to prove that criminal acts were committed. For starters, the Attorney General can review the victims revealed in a 2004 study, lead by FDA scientist, Dr Graham, that says Vioxx caused as many as 140,000 heart attacks and strokes and killed as many as 55,000 people.

Injured parties can find more information at Lawyers and Settlements.com

http://www.lawyersandsettlements.com/articles/merck_legal.html

Evelyn Pringle
evelyn.pringle@sbcglobal.net

(Evelyn Pringle is a columnist for OpEd News and an investigative journalist focused on exposing corruption in government and corporate America)

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