Global Insight Perspective | |
Significance | Merck has agreed to pay US$4.85 billion to settle the majority of lawsuits, but this is not a class-action lawsuit and plaintiffs have to meet three sets of criteria before being considered eligible for payment under the settlement agreement. Merck can withdraw from the deal unless at least 85% of eligible plaintiffs agree to participate. |
Implications | The settlement has been made possible as a result of Merck's strong performance in the initial Vioxx claims that made it to trial. The agreement sets clear deadlines and eliminates the risk that Merck could be swamped with Vioxx-related claims for heart attacks occurring long after Vioxx use. |
Outlook | The way Merck has handled the Vioxx litigation could become a textbook example of how to handle product liability lawsuits. The case could set a precedent for future lawsuits; on the positive side, it seems to have in-built controls to discourage frivolous lawsuits. For Merck, the settlement removes a significant source of uncertainty and litigation costs and allows the company to focus management and financial resources on its core business. |
Vioxx Settlement Agreed
On Friday (9 November), Merck and plaintiffs' lawyers hammered out an agreement that would see the pharma company pay out US$4.85 billion to settle the majority of product liability lawsuits related to alleged damage suffered by people who took the company's pain drug Vioxx. The drug was withdrawn from the market in September 2004 after the so-called Vigor trial discovered an increased risk of myocardial infarction (heart attack) and ischemic stroke in patients taking Vioxx over a long period of time (18 months in the study). Merck has always denied liability and adopted a strategy of fighting the individual cases one by one in court, winning 12 and losing five of the cases that made to trial.
With the current agreement, Merck maintains that it admits no liability and that the settlement concerns a conglomeration of individual cases rather than a class-action agreement. Under the deal, the company will pay out a total of US$4.85 billion, which will be recorded as a pre-tax charge in the fourth quarter of 2007. Of the total, US$4 billion will go towards payments to plaintiffs who have suffered heart attacks and US$850 million will be paid to those who have suffered an ischemic stroke.
The settlement was reached, according to the Wall Street Journal, after the four judges presiding over 95% of the Vioxx cases to make it to trial urged the plaintiffs' attorneys and Merck to reach an agreement. The final deal was hammered out following three days and nights of negotiations involving Merck lawyers and six lawyers representing key plaintiffs.
Merck can pull out of the agreement and continue fighting each case individually unless at least 85% of eligible plaintiffs in each of the key categories agree to participate in the settlement by 1 March 2008, as follows:
- 85% or more of all currently pending and tolled myocardial infarction claims,
- 85% or more of all currently pending and tolled ischemic stroke claims;
- 85%or more of all eligible claims involving a death; and
- 85% or more of all eligible claims alleging more than 12 months of Vioxx use.
The agreement applies only to U.S. legal residents and those who allege that their myocardial infacrtion or ischemic stroke occurred in the United States.
Complex Awards System Announced
In order to be eligible for participating in the settlement agreement, plaintiffs must meet three eligibility criteria:
- They must have suffered a myocardial infarction or ischemic stroke. The presence of this condition eliminates around 10,000-15,000 potential plaintiffs. Those cases, perceived to be much weaker, will have to continue their claims through the legal system.
- Claimants must have documented proof that they have received at least 30 Vioxx pills
- The myocardial infarction or ischemic stroke must have occurred within 14 days after ingestion of Vioxx.
For plaintiffs that meet these criteria, the amount of damages will be calculated by a third-party arbitrator before being approved by Merck and plaintiff lawyers. The amount of payments will depend on the severity of the adverse effects suffered and the ability to establish a link to Vioxx use. According to a Wall Street Journal report, the way to calculate damages will be fairly complicated. For example, if a plaintiff had a cardiovascular event prior to the Vioxx label change after Vigor was completed, they will receive an extra 15% payment; if the cardiovascular event was after the Vioxx label change, they will lose 15%.
Outlook and Implications
Looking back on the Vioxx litigation, Global Insight would be unsurprised if the case enters legal textbooks on how companies should handle product liability litigation. Initial estimates of liability payments of around US$50 billion have ended with a settlement agreement of just US$4.85 billion.
Firstly, Merck has played its cards very well. The company's strategy of fighting each individual case separately meant that many U.S. courts faced the prospect of having a significant backlog of Vioxx litigation for years to come; hence, the determination of judges to push for an out-of-court settlement. Secondly, this meant that some plaintiffs would not have their cases heard for several years. In addition, Merck secured several decisive victories early on in the litigation, and these victories were for some of the most clear cut cases where liability should have been easier to demonstrate. Merck won 12 of those and lost five, sending a message to remaining plaintiffs that their triumph in court was far from guaranteed. Finally, the statute of limitations (specifying the time within which litigation can be filed) has now expired in 42 U.S. states. This means that those who could have filed have already done so in most states. Thus, it is easier to establish the final number of plaintiffs. According to current estimates, 45,000-50,000 people would be eligible for participating in this settlement. If fewer than those pass the eligibility criteria, there will be more money to split between them. If more make it to the final cut, the amount Merck has promised to pay is set and will not be raised. Plaintiffs should get an average payment of US$200,000 under the deal, according to the Wall Street Journal. Payments for the strongest cases will be in the range of US$1.0-1.5 million. As much as one-third of payments would go towards lawyers' fees. Some plaintiffs could also lose part of the payout as their health insurance company seeks to recoup money paid towards the treatment of a myocardial infarction or ischemic stroke.
The deal ends most of the Vioxx litigation uncertainty that has eroded Merck's share price. The plaintiffs left outside the deal are not expected to be able to mount a strong legal attack. By setting clear criteria on who is eligible, Merck is seeking to avoid a repeat of the Wyeth (U.S.) "fen-phen" fiasco where settlement costs ballooned to US$21 billion after the company failed to set proper limitations in its US$3.75-billion settlement in 1999. After a brilliantly executed legal strategy of taking on the hardest cases and winning in most, Merck's management should be able to refocus efforts and resources saved from continuing litigation (in the range of tens of billons of U.S. dollars per year) on the company's core business of developing and selling innovative pharmaceuticals.
For the pharma industry, the settlement is not a bad development either. It may some day provide a textbook example on how product liability lawsuits should be handled. There are some concerns that the high payout may encourage future frivolous litigation over drug safety risks. However, such concerns are largely unfounded, in our view. The Vioxx settlement is worded in such a way that it would weed out "frivolous" lawsuits. Lawyers are also encouraged not to abuse the settlement: under the agreement, if a lawyer recommends accepting the settlement to one client they have to recommend it to all of their clients. A separate legal fund, collected from a percentage of the legal fees all plaintiffs pay, will go towards paying the costs of the lawyers who did most of the leg work in the Vioxx litigation—similar to a bonus. This way, the burden of legal costs will be partly shared among plaintiffs, with the lawyers genuinely accountable for most of the work being rewarded.
Having said that expect years of bickering among law firms that claim to represent the same client over fees. Health insurers are also expected to attempt to secure part of the payout, and their claims may not be limited to myocardial infarction and ischemic stroke. However, the burden of arguing with them will fall on the plaintiffs rather than on Merck. Merck itself is not quite in the clear yet. Even as the company settles product liability lawsuits, it is still facing litigation from health insurers and Medicaid in some states alleging fraud in seeking reimbursement for Vioxx at a price that was too high given the side-effects. The burden of proof in fraud litigation is lower than in product liability cases; hence, there is a risk to Merck. We expect a settlement with the payers in future, but the value should be relatively modest as it will be calculated in proportion to the current US$4.85-billion settlement.