By Steven DiJoseph
Regardless of which dictionary you choose, the definition of Ã¢â‚¬Å“strategyÃ¢â‚¬Â is about the same: a careful plan or method; a clever stratagem; or the art of devising or employing plans or stratagems toward a goal (http://aolsvc.merriam-webster.aol.com/home-aol.htm).
Not every plan, no matter how well-conceived or carefully formulated, adopted as a Ã¢â‚¬Å“strategyÃ¢â‚¬Â is successful, however. Thus, history is littered with strategies gone wrong, failed strategies, and strategies that were stubbornly adhered to even as it became clear they were not working.
Thus, there comes a defining moment when every Ã¢â‚¬Å“strategyÃ¢â‚¬Â either shows itself to be worthy of that label or not. Simply stated, once a strategy fails, it s no longer a strategy at all.
When it came to adopting a corporate policy with respect to its embattled COX-2 inhibitor, <"http://www.yourlawyer.com/topics/overview/vioxx">Vioxx, Merck had to make an initial decision as to whether it would litigate the matter or negotiate a settlement.
On the Ã¢â‚¬Å“letÃ¢â‚¬â„¢s litigateÃ¢â‚¬Â side of the ledger there were the following considerations that favored Merck:
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Vioxx had been approved by the FDA.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Merck believed it had acted responsibly in marketing Vioxx (after that FDA approval) and voluntarily pulling it from the market as soon as hard evidence surfaced that the drug posed a significant risk of heart-related side-effects.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Merck certainly had the financial ability to assemble the best legal team money could buy and go to head-to-head with any plaintiffsÃ¢â‚¬â„¢ law firm where it could win by simply forcing each plaintiff to prove his or her case.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Merck could parade highly reputable medical experts before each jury that would vouch for the safety of the drug, the responsible nature of MerckÃ¢â‚¬â„¢s actions, and alternate reasons for each plaintiffÃ¢â‚¬â„¢s injuries. Ã‚Â
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Virtually all of the people taking Vioxx had one or more serious risk factors that could explain the injury (or death) they were alleging was caused by the drug.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â About half of the pending cases involving Vioxx were in MerckÃ¢â‚¬â„¢s home state of New Jersey.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â At worst, the evidence that prompted Merck to pull Vioxx from the market only related to Ã¢â‚¬Å“long-termÃ¢â‚¬Â Vioxx use (in the area of 18 months). That made the Ã¢â‚¬Å“short-termÃ¢â‚¬Â cases (on paper, at least) highly defensible and unworthy of inclusion in any settlement scenario.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Merck could set aside an enormous sum of money to cover litigation expenses and any damages in excess of, or not covered by, insurance.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Hubris (exaggerated pride or self-confidence).
Early on, the Ã¢â‚¬Å“letÃ¢â‚¬â„¢s negotiateÃ¢â‚¬Â side of the argument presented a few factors that favored a quick and complete Ã¢â‚¬Å“globalÃ¢â‚¬Â resolution of the matter:
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â History has shown time and time again that the earlier a corporate litigation problem with major financial exposure is settled the less it costs in terms of money and damage to the brand.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Many of the cases involved long-term Vioxx users who would not be prone to the formidable defenses available in the short-term cases.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Punitive damages (not covered by insurance) could prove to be a problem if juries believed Merck had engaged in willful or reckless conduct in marketing Vioxx.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â The litigation could cause Merck to suffer a diminution in stock value that could lead to unhappy shareholders and a loss of the financial liquidity needed to remain a Ã¢â‚¬Å“playerÃ¢â‚¬Â in the high-stakes world of prescription drug development and marketing.
Ã‚Â·Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Some impressive, and quite staunch, anti-Vioxx expert witnesses (who might be permitted to testify) including Dr. Eric Topol (then of the prestigious Cleveland Clinic) and Dr. David Graham, a senior epidemiologist (and highly regarded whistleblower) with the FDA itself.
Thus, as the first Vioxx cases made their way up the trial calendar, no one could say for sure which of the approaches would prove more successful or if some middle-ground (settle cases with potential exposure and try cases that were winnable) might turn out to be the most advantageous to Merck.
Now, however, six completed trials into the saga the landscape has changed dramatically for Merck and its hard-line strategy of trying every case to verdict and to show nothing but disdain for even the suggestion that it consider settlement as an option.
In order to remain hunkered down behind its Maginot Line-like position, MerckÃ¢â‚¬â„¢s legal team and corporate officers have now had to ignore some compelling factors that were not considerations while the litigation was in its pre-trial stages. These include:
- A virtual mountain of evidence that seriously challenges every aspect of MerckÃ¢â‚¬â„¢s defense.
- Proof that Merck may have manipulated or even deleted critical data from a key clinical trial and the publication of the results in a prestigious medical journal.
- Snowballing claims that jumped by the thousands to now hover near the 12,000 case mark.
- Several adverse rulings on evidence, scheduling, discovery, witnesses (inclusion and exclusion), and courtroom procedures.
- Judges (Higbee in New Jersey state court and Fallon in federal court) who have been critical of MerckÃ¢â‚¬â„¢s courtroom antics, creative in their scheduling of cases for trial in order to expedite a possible settlement. (This includes trying more than one case at the same time, aggregating the long-term cases for earlier trail, and refusing to postpone or adjourn trials to avoid what Merck perceived as prejudice to its position).
- A 50% loss rate which does not bode well for Merck if it intends to try all 12,000 cases.
- Three massive verdicts that include substantial punitive damage awards.
- A loss in a short-term-use case (as well as a loss in New Jersey) that means no fact pattern (or jurisdiction) can be considered truly defensible by Merck.
- Litigation and appeals that could drag out for years.
- Unhappy shareholders.
- Damages and legal fees that could exceed by many times over the fund set aside by Merck to cover litigation costs and uninsured damages.
- Bad publicity worldwide on a daily basis.
- Potential loss of the financial liquidity needed to fuel R&D with respect to new drugs and to remain competitive with other giants like Pfizer, GSK, Sanofi-Aventis, J&J, AstraZeneca, Novartis, Roche, Lilly, Bristol-Meyers Squibb, and Wyeth.
There are still a few die-hard financial analysts that remain optimistic that Merck is still financially sound despite its rapidly deteriorating litigation posture, and the companyÃ¢â‚¬â„¢s legal counsel clings to the increasingly myopic view that its Ã¢â‚¬Å“damn the torpedoes, full speed aheadÃ¢â‚¬Â strategy remains a responsible approach.
These views, however, are certainly no longer shared by most financial experts and legal observers. The prevailing view on Wall Street is now that Merck (and its investors) may very well be living in a house of cards propped up by little more than wishful thinking. Legal analysts are even more pessimistic (if thatÃ¢â‚¬â„¢s possible) and see MerckÃ¢â‚¬â„¢s defiance as little more than Ã¢â‚¬Å“arranging the deck chairs on the Titanic.Ã¢â‚¬Â
While forcing plaintiffs to prove their cases (on liability and damages) is a viable strategy when a Ã¢â‚¬Å“deep pocketÃ¢â‚¬Â defendant is faced with one, or no more than a few, serious cases, the wisdom of a Ã¢â‚¬Å“damn the torpedoes, full speed aheadÃ¢â‚¬Â approach becomes shaky at best when the number of cases is in the thousands.
As we previously reported, MerckÃ¢â‚¬â„¢s problem is that three virtually insurmountable obstacles are simultaneously pushing the company toward a financial catastrophe.
In addition to some 12,000 unresolved personal injury and wrongful death claims, Merck also faces a massive class-action brought by drug plans and insurance carriers that could expose the company to a treble damage, multi-billion dollar verdict.
There is also the matter of state Medicare claims that also expose Merck to billions of dollars more in potential verdicts.
Thus, for MerckÃ¢â‚¬â„¢s Ã¢â‚¬Å“no payÃ¢â‚¬Â strategy to have had any chance of success, the pharmaceutical giant would have had to win virtually every one of the 12,000 individual cases and then to have hoped that such success would serve to defeat the claims by Medicare and healthcare plans.
The fundamental flaw in MerckÃ¢â‚¬â„¢s defiant position, however, has always been that there are simply too many cases, both in number and type, to justify it.
It should not have come as a surprise to Merck to find itself in the serious predicament it now faces.Ã‚Â Merck can take the position that it was always concerned with safety and that it only pulled Vioxx off the market after there was evidence that a cardiovascular risk existed, but the mountain of evidence is clearly to the contrary.
In fact, even Merck admits that long-term Vioxx users (over 18 months) were specifically vulnerable to an increased risk of cardiovascular problems.
Thus, the thousands of cases involving such plaintiffs were, at best, a toss-up regardless of how impaired the patientsÃ¢â‚¬â„¢ health was – separate and apart form the complications alleged to have been the result of Vioxx use.
The short-term use cases, although more easily defended, still had a significant risk of failure associated with them because many of those plaintiffs were otherwise healthy. There was also the truism, which Merck apparently chose to ignore, that, out of thousands of cases, different juries, in different places, presented with different evidence will render different verdicts. YesterdayÃ¢â‚¬â„¢s $32 million verdict in a very-short-term use case proved that in convincing fashion.
Merck also failed to appreciate the fact that each case it won was not in any way the equivalent of each case it lost. Wins were merely dust in the wind, while losses were nails in its coffin. Each win was still an expensive, time-consuming exercise from which remaining plaintiffs and their attorneys could learn. Each loss was equally expensive and time consuming; however those outcomes also carried with them hefty damage awards and potential appeals.
Between the huge number of losses Merck had to realize it would face in the personal injury and death cases (unless the company and its attorneys were completely out of touch with reality and living in a state of total denial), the private third-party health benefits plans class-action, and the state Medicare lawsuits, MerckÃ¢â‚¬â„¢s exposure could actually soar to the astronomical figures of $20 to $50 billion (or more) once predicted by legal and financial analysts.
Such amounts could easily exceed MerckÃ¢â‚¬â„¢s insurance coverage and financially cripple the worldÃ¢â‚¬â„¢s fifth largest drug maker. They could hamper product development as well as MerckÃ¢â‚¬â„¢s ability to partner with smaller companies in joint ventures.
There is also the fact that any punitive damage awards based on MerckÃ¢â‚¬â„¢s willful marketing of Vioxx notwithstanding its awareness of the increased risk of heart attacks and the mountain of evidence that it may have manipulated, withheld, and even tampered with clinical study results are not covered by insurance and would have to be paid directly by Merck.
Massive judgments and settlement payments could also enrage disgruntled shareholders who have already suffered massive losses to the value of their investments in the company since October of 2004. (Shareholders of Elan, the manufacturer of the embattled MS drug Tysabri just released its 2005 Annual statement that revealed its shareholders have already commenced derivative suits accusing it of fraud and other wrongdoing that compromised the value of that companyÃ¢â‚¬â„¢s stock value.)
There would also be the potential that courts (especially in Texas and New Jersey) would start applying the doctrine of Ã¢â‚¬Å“collateral estoppelÃ¢â‚¬Â to specific issues involving MerckÃ¢â‚¬â„¢s liability thereby preventing the company from re-litigating them over and over again hoping to convince different juries to reach different results on the same evidence.
Merck would have to go on the greatest winning steak in the history of litigation (12,000-0) to stave off a financial catastrophe since each negative verdict has the potential of being in the tens of millions of dollars. Even scattered losses for Merck can add up to a financial disaster.
Is such a possibility realistic? Not even MerckÃ¢â‚¬â„¢s attorneys could believe that. Shortly after the first verdict in MerckÃ¢â‚¬â„¢s favor we spoke with several seasoned trial and appellate attorneys who were all of the same opinion; MerckÃ¢â‚¬â„¢s victory meant little, if anything, to the overall litigation situation the company faces. This was especially true since Merck had repeatedly stated that it intended to fight each case individually.
The reason for the attorneysÃ¢â‚¬â„¢ opinion was that each case Merck wins only serves as a victory on the particular facts of that case since every plaintiffÃ¢â‚¬â„¢s claim is factually different and the law allows each injured party to have a chance to prove his or her case.
Each case that Merck loses, however, has a cumulatively negative effect since the company has gotten another chance to prove its lack of culpability and has failed. As one attorney put it: Ã¢â‚¬Å“Each plaintiff has only one chance to prove heÃ¢â‚¬â„¢s right in order to win, but Merck has to show itÃ¢â‚¬â„¢s right several thousand more times in order to walk away without being liable. The likelihood of that is zero.Ã¢â‚¬Â
The three (out of six) losses illustrate the hopelessness of MerckÃ¢â‚¬â„¢s position to litigate every case.
More damaging, however, has been jurorsÃ¢â‚¬â„¢ willingness to find that Merck failed to provide appropriate warning of the increased cardiovascular risk posed by Vioxx. That finding demonstrates the difficulty lay people are having with MerckÃ¢â‚¬â„¢s Ã¢â‚¬Å“good guyÃ¢â‚¬Â defense. (In fact, in the last New Jersey double trial, the jury found inadequate warnings even as to the plaintiff who lost on the heart attack issue.)
Thus, the fact that the same jury found that the drug did not contribute to the other plaintiffÃ¢â‚¬â„¢s heart attack was of little or no significance in terms of the long-term litigation outlook for Merck.
As Sherwood Small, a fund manager with Boston Private Value, was quoted as saying after the split New Jersey verdicts: Ã¢â‚¬Å“There’s no way that (Merck) is going to continue to pursue this strategy of trying every case. It would be foolhardy and very expensive. This (split verdict) doesn’t put Merck in a great position.”
In previous trials involving short-term use, Merck had been successful in arguing that there was no evidence of increased heart risk associated with such use of Vioxx or that the plaintiffÃ¢â‚¬â„¢s pre-existing medical problems were the root-cause of the alleged injuries.
The latest loss in Texas, however, demonstrates that the overall belief that Vioxx was dangerous and Merck was less than open with the FDA, the medical establishment and the public has ad a Ã¢â‚¬Å“spill-overÃ¢â‚¬Â effect onto the once defensible short-term-use cases.
Long-term-use cases, which have always been a source of great exposure, are now more likely than ever to fall like dominos into the plaintiffsÃ¢â‚¬â„¢ win column.
The study that led to the withdrawal of Vioxx from the market showed the drug doubled the risk of heart attack and stroke among people who used it for at least 18 months. Merck may win some of these cases where the plaintiffs had significant collateral health problems; however, it must be prepared now to lose the bulk of the Ã¢â‚¬Å“long-term useÃ¢â‚¬Â trials.
Thus, even if Merck continues to split between wins and losses, the projected compensatory and punitive damage totals are prohibitively high for any corporation to absorb and still remain viable and competitive.
Then there is the massive class-action that would include all non-governmental health plans that paid for members’ Vioxx prescriptions alleges that Merck misrepresented the safety profile of the expensive painkiller, ignoring clear and early warning signs of its risks in order to continue its sale.
The health plans contend that, had they been properly informed of the facts, they would not have included Vioxx on their lists of approved medicines or agreed to reimburse their members for its high cost.
Many experts and consumer advocates maintain that in addition to its higher risk for heart-related problems, Vioxx (and the other COX-2 inhibitors, Celebrex and Bextra) were no more effective than far less expensive painkillers already on the market; Ã¢â‚¬Å“Super aspirinsÃ¢â‚¬Â as they have been dubbed by Public Citizen.
In seeking reimbursement for medical plan payments, the plaintiffs will not have to prove Vioxx caused any specific personal injuries or deaths. All that the plans would have to prove is that Merck continued to push the sale of Vioxx after it was aware of the increased cardiovascular risks the drug posed.
In this regard, there is an enormous amount of evidence in terms of internal Merck documents, clinical tests, expert testimony, and damaging proof of altered data that would be difficult for a jury to disregard with respect to the claims involved in the class-action (as opposed to the personal injury actions where medical causation is also required).
Moreover, the damages involved in the class-action are massive. The potential $30 billion downside risk in one single verdict is a sobering reminder to Merck that a financial disaster is looming on the horizon.
The companyÃ¢â‚¬â„¢s case by case approach to defending the 12,000-plus personal injury suits would not be of any benefit in the class-action. The 2005 Class Action Fairness Act, which moves most interstate class-actions into federal courts, does not apply here since the Vioxx third-party-payor suit was filed in 2003. Thus, that case will remain in New Jersey state court.
The state-government actions that are similar to the class-action and seek reimbursement (and penalties) for prescription benefits paid for Vioxx through state-run Medicare programs.
Texas alone is seeking $168 million in damages and additional civil penalties. Texas Attorney General, Greg Abbott, believes the state can prove total damages in excess of $250 million including treble (triple) reimbursement of $56 million (or $168 million) for five years of filled Vioxx prescriptions.
It is estimated that 700,000 Vioxx prescriptions were filled through Medicaid during those five years in Texas alone. Abbott sees these prescriptions as part of a willful misrepresentation on MerckÃ¢â‚¬â„¢s part as to the safety of the drug. To him, the entire affair represents nothing more than Ã¢â‚¬Å“a prime example of a companyÃ¢â‚¬â„¢s drive for profit steamrolling its duty to be safe.Ã¢â‚¬Â
While the Vioxx personal injury and wrongful death lawsuits are far more dramatic, it may be the rather dry health-plan and Medicare reimbursement actions that bring down Merck. One attorney familiar with the litigation told us that, in a way, Ã¢â‚¬Å“the class- and Medicare-actions, if successful, would be similar to bringing down the notorious Al Capone on nothing more than the rather dull charge of income tax evasion.Ã¢â‚¬Â
And then comes the issue of punitive damages.
The juries that have rendered verdicts against Merck do not seem the least bit reluctant to hit the company hard with punitive damage awards. The same New Jersey jury that awarded $4.5 million in compensatory damages against Merck then returned an additional $9 million punitive damage award. Texas juries have found punitive damages of $229 million and (yesterday) $25 million.
While the award of significant amounts of compensatory damages is serious enough, it pales in comparison to the implications associated with an assessment of punitive (or Ã¢â‚¬Å“exemplaryÃ¢â‚¬Â) damages.
Granted punitive damages are prone to be cut significantly by the trial judge or as required by individual state statutes; however what remains of the awards will still be quite problematic for Merck for the following reasons:
- Exemplary damages are designed to punish a defendant and discourage similar conduct in the future. They are not meant to compensate the plaintiff. Thus, unless limited by statute, they are a function of a defendantÃ¢â‚¬â„¢s financial profile.
- Even where a state limits the size of a punitive damage award, the amount is still considerable greater than simple compensatory damages. Thus, in New Jersey, where punitive damages are limited to a maximum of five times the amount of compensatory damages, the exposure a defendant is subject to is considerable. In the current case, exemplary damages could have been as high as $22 million. (The $229 million punitive damage award against Merck in Texas, even when reduced, meant the total award would still be $26 million.)
- Punitive damages carry with them a finding of conduct that is far more onerous than that of simple negligence. Depending on the state, definitions of the type of conduct that justifies the imposition of punitive damages include such terms as willful, wanton, and reckless among others.
- Some states, like New Jersey have statutes that require cases where punitive damages are awarded to be referred to prosecutorial agencies for investigation into whether any crimes were committed. In New Jersey, the statute states: Ã¢â‚¬Å“2A:15-5.17. Record referred for criminal investigation Ã¢â‚¬Â¦Upon the conclusion of any action in which punitive damages have been awarded, the court shall refer the record of that action to the prosecutor of the county in which the case was tried and to the Attorney General for investigation as to whether a criminal act has been committed by the defendant.Ã¢â‚¬Â
- Punitive damages are not covered by insurance. The exclusion is based on the twofold reasoning that (a) the conduct is tantamount to an intentional act on the part of the insured, and (b) the intent of punitive damages would be thwarted if a defendant could insulate itself from paying such an award simply by buying more insurance.
- Any company exposed to as many lawsuits as Merck faces over Vioxx will quickly run out of any Ã¢â‚¬Å“war chestÃ¢â‚¬Â that it has set aside to cover litigation costs. Merck set aside $970 million for such costs; however, only two punitive damage awards have already eroded that fund by several million dollars. At this rate, Merck would only be able to withstand one or two hundred such awards at best. Since there are some 10,000 additional cases pending, there is simply no way Merck can pay the full number of potential punitive damage awards without suffering a financial collapse.
- Since Merck has now had the opportunity to fully litigate the issue of its conduct with respect to the marketing of Vioxx and has been found liable for punitive damages, the issue may not be re-litigated again and again by Merck in the hope of getting other juries to find differently. While compensatory damages vary from case to case and must be proven by each plaintiff in addition to proving causation, the underlying basis for finding a defendant liable for punitive damages may not. If the conduct is the same, as it is in the case of Vioxx, then all that will vary is the amount of the punitive damages.
- Punitive damages make for a serious issue vis-ÃƒÂ -vis a companyÃ¢â‚¬â„¢s shareholders who will have a basis for a derivative lawsuit seeking damages for conduct by the company that compromised the value of the shareholdersÃ¢â‚¬â„¢ investments. (Shareholders of Elan, the manufacturer of the embattled MS drug Tysabri just released its 2005 Annual statement that revealed its shareholders have already commenced derivative suits accusing it of fraud and other wrongdoing that compromised the value of that companyÃ¢â‚¬â„¢s stock value.)
Clearly, the time has come for Merck to abandon its Ã¢â‚¬Å“strategyÃ¢â‚¬Â at least with respect to a global settlement of the more viable personal injury and wrongful death cases involving long-term Vioxx users and those short-term users who were in relatively good health.
As one appellate attorney familiar with the litigation put it: Ã¢â‚¬Å“To keep avoiding any settlement discussions is no longer a viable option for Merck. We are not talking about aging a fine wine here. The delay could spell financial disaster for Merck no matter how big a company it is.Ã¢â‚¬Â
It also appears that Judges Higbee (New Jersey) and Fallon (federal), who presides over the bulk of the individual personal injury and death cases involving Vioxx are interested in forcing Merck into seriously reconsidering its position and entering into some sort of global settlement to resolve all, or at least a significant number of the pending cases.
Neither judge seems interested nor inclined to sit through an endless stream of trials that will prove little else than that Merck is in an untenable position with little hope of any meaningful degree of vindication. It has become quite clear to those who are not too blind to see that Merck may still win some battles, but it has already lost the war.