Lessons From the Merck Debacle

I know that Merck was represented by esteemed law firms (Fulbright & Jaworski and Williams & Connolly), and 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-manufactured pain reliever, it was clear that Merck was vulnerable on the main pillar of its defense, which is that Vioxx didn't cause the irregular heartbeat that was the stated cause of the husband's death.

Merck and its legal team should have recognized this and settled the potentially precedent-setting 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 garner attention and send a message, as it was repeatedly encouraged to do by the evidently spellbinding plaintiff's lawyer and lay preacher Mark Lanier. The Wall Street Journal reported that Lanier even planted the notion that a verdict for the widow might gain the jurors an appearance on "The Oprah Winfrey Show." I wouldn't be the least surprised if jurors do show up on Oprah, Hollywood agents in tow, in a seemingly inevitable fusion of civic duty, celebrity and reality TV. But how a judge could allow such patently irrelevant and inflammatory comments at trial is beyond me.

I sympathize with Merck's lawyers who had to sit through this kind of spectacle. Nonetheless, they should have seen it coming. The series of internal Merck documents casting doubt on the safety of Vioxx, which have been leaking into the media for months, put Merck in the vulnerable position of appearing to have ignored, suppressed or even covered up data that put patients' lives at risk. Even had Merck acted in accord with the highest medical standards then prevailing, the contest between a grieving widow and a giant pharmaceutical company 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: that the victim died of an irregular heartbeat. While Vioxx was associated with an increased risk of heart attack, there was 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 column assessing the risks of Merck's decision to go to trial, I warned readers not to invest in Merck hoping for a favorable verdict, because of the very kinds of irrationality that seemed to infiltrate the Merck jury and have become all too prevalent in today's casino-like 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.

Then the trial began. Right off the bat, a Merck doctor conceded on the witness stand that she couldn't entirely eliminate the possibility that a heart attack had preceded and perhaps even caused the victim's irregular heartbeat. She deserves to be commended for such candor, but how could Merck have gone to trial knowing that its own employee would deliver a blow to its central defense? There was worse to come. 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, surely one of the most obvious and important potential witnesses. It's no excuse that she had since moved to the Middle East. It was plaintiff's lawyer Lanier who had the common sense and persistence to track her down in Abu Dhabi, an effort that earned him what will surely be a fee of many millions. Undercutting her own death certificate, the coroner returned to Texas and readily testified that she believed the victim had suffered a heart attack. It's no wonder the jury spent less than an hour resolving this critical issue in favor of the grieving widow and against Merck.

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 and access to much-needed drugs that nonetheless carry the risks of serious side effects. Surely it's time for Merck to rethink its strategy of fighting all 4,000-plus pending Vioxx suits on a case-by-case basis, not to mention the additional thousands that will no doubt be inspired by this verdict, and find a way to settle most of them.

With its stock battered, near $27 this week, Merck might pose limited downside risk to investors. I would reject out-of-hand the notion that the drug companies are the next tobacco or asbestos industry. The pharmaceutical companies may make mistakes, but let's not forget that they're in the business of saving lives, and their futures depend on that.

The problem is that there's little upside for Merck, either. This verdict and the thousands of pending cases against Merck will be a cloud over the company for years.

I reiterate my earlier advice, which is to avoid Merck and all individual pharmaceutical and biotech stocks and buy health-care-sector 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. I continue to believe that demographics and science favor the drug industry over the next decade. Its current travails and unflattering portrayals like those in the Vioxx case have depressed pharmaceutical stocks across the board, making this a good time to buy.