WSJ.com - First Vioxx Verdict Casts Doubt On Merck, But Not the Industry

First Vioxx Verdict Casts Doubt
On Merck, But Not the Industry

By JAMES B. STEWART
SmartMoney
August 24, 2005; Page D2

There's much to ponder in last week's $253 million jury verdict against Merck, but the question lingering in my mind: What was Merck thinking when it went to trial?

It's easy to criticize a legal strategy in hindsight. But even before a Texas jury ruled in favor of a widow whose husband died after taking Vioxx, a Merck pain reliever, it was clear that the company was vulnerable on the main pillar of its defense, which is Vioxx didn't cause the irregular heartbeat that was the stated cause of death. Merck and its legal team should have recognized this and settled the case.

This isn't to say that there weren't disturbing elements of irrationality and even possible impropriety in the jury verdict that deserve to be explored on appeal. The amount -- $253 million -- is vastly more than is permitted under Texas law, and looks like little more than grandstanding on the part of a jury eager to send a message, as it was repeatedly encouraged to do by the plaintiff's lawyer, Mark Lanier.

I sympathize with Merck's lawyers, but they should have seen it coming. The series of internal Merck documents casting doubt on the safety of Vioxx put Merck in the vulnerable position of appearing to have ignored, suppressed or even covered up data. Even if Merck had acted in accord with the highest medical standards then prevailing, the contest between a grieving widow and a pharmaceutical giant earning billions while seeming to discount evidence of heart attacks was never going to be one Merck could expect to win.

But Merck had one seemingly irrefutable defense: The victim died of an irregular heartbeat. While Vioxx was associated with an increased risk of heart attack, there were no data linking it to the cause of death in this case.

Based on Merck's public statements, I assumed this to be true. Even so, in an earlier column¹ I warned readers not to invest in Merck hoping for a favorable verdict, because of the very kinds of irrationality that have become all too prevalent in liability trials. Nonetheless, it seemed inconceivable to me that Merck would make such statements and proceed to trial without ironclad evidence to support its defense.

Right off the bat at the trial, a Merck doctor conceded she couldn't eliminate the possibility that a heart attack had preceded and perhaps even caused the victim's irregular heartbeat. She deserves to be commended for her candor, but how could Merck have gone to trial knowing that its own employee would deliver a blow to its defense?

The most persuasive support for Merck's defense was the coroner's report ascribing the victim's death to arrhythmia, or irregular heartbeat. But Merck's legal team appears never to have interviewed the coroner. It's no excuse that she had since moved to the Middle East. It was plaintiff's lawyer Mr. Lanier who tracked her down. The coroner returned to Texas and testified that she believed the victim had suffered a heart attack.

This verdict -- and any more like it -- has the potential to inflict serious harm on Merck, the pharmaceutical industry and, more broadly, the development of much-needed drugs that nonetheless carry risks of serious side effects.

With its stock battered, near $27 this week, Merck might pose limited downside risk to investors. The drug companies may make mistakes, but let's not forget they're in the business of saving lives, and their futures depend on that.

The problem is there's little upside for Merck. I reiterate my earlier advice, which is to avoid Merck and all individual pharmaceutical and biotech stocks, and buy health-care mutual funds, exchange-traded funds and index funds. Many of the latter will still give you some exposure to Merck, given its size, but you will be amply diversified.

James B. Stewart is an editor at large at SmartMoney magazine and a contributing editor at SmartMoney.com. He may have positions in the stocks he writes about. To read past Common Sense columns, visit http://www.smartmoney.com/commonsense/index.cfm?story=archive&nav=wsjpj².

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