Vioxx litigation update provided by Merck

This morning, Merck & Co.,Inc. announced its full-year results for 2004 and, as expected by analysts, it has been seriously hurt by recall of Vioxx. While the detailed statement from Merck is at the bottom, here is a summary of what Merck is saying:

• Class action lawsuits by Vioxx victims have exploded and trials will begin in the first half of 2005. (Related article: Vioxx MDL hearings scheduled)
• Merck shareholders and participants in its retirement plans are also suing Merck since the stock has taken a strong beating since Vioxx recall.
• Merck is also being investigated by several federal agencies.
• Merck continues to be in denial that it will have to pay even a penny to Vioxx victims. The company has not made any provisions for its Vioxx liabilities and has allocated just $604 million reserve solely for future legal defense costs for VIOXX litigation.
• Merck's insurers are already backing off from some of the insurance commitments. Due to the enormous liabilities that Merck might face (analysts estimates range from $18 billion to $55 billion in Vioxx lawsuits alone), Merck admits that there are ongoing disputes with insurance companies.
• Merck also admits that since it is not making any provisions for Vioxx liabilities and if it has to pay Vioxx victims in line with what Vioxx attorneys are demanding, it will essentially go out of business.

Following are parts of the statement released by Merck that relates to Vioxx litigation update:

As previously disclosed by Merck, federal and state personal injury lawsuits involving individual claims, as well as several putative class actions have been filed against the company with respect to VIOXX. As of Dec. 31, the company has been served or is aware that it has been named as a defendant in approximately 575 lawsuits, which include approximately 1,400 plaintiff groups alleging personal injuries resulting from the use of VIOXX. Certain of these lawsuits include allegations regarding gastrointestinal bleeding, cardiovascular events, thrombotic events or kidney damage. The company has also been named as a defendant in approximately 70 putative class actions alleging personal injuries or seeking:

1. Medical monitoring as a result of the putative class members' use of VIOXX,
2. Disgorgement of certain profits under common law unjust enrichment theories, and/or
3. Various remedies under state consumer fraud and fair business practice statutes, including recovering the cost of VIOXX purchased by individuals and third-party payors such as union health plans (all of the actions discussed in this paragraph are collectively referred to as the "VIOXX Product Liability Lawsuits").

The actions filed in the state courts of California and New Jersey, respectively, have been transferred to a single judge in each state for coordinated proceedings. In addition, the company has filed a motion with the Judicial Panel on Multidistrict Litigation (MDL) seeking to transfer to a single federal judge and consolidate for pretrial purposes all federal cases alleging personal injury and/or economic loss relating to the purchase or use of VIOXX; several plaintiffs in certain VIOXX Product Liability Lawsuits pending in federal court have made similar requests. The hearing on these motions will be held on Jan. 27.

Also as previously disclosed, in addition to the VIOXX Product Liability Lawsuits, a number of purported class action lawsuits have been brought naming as defendants the company and several current or former officers of the company, and alleging that the defendants made false and misleading statements regarding VIOXX in violation of the federal securities laws (the "VIOXX Securities Lawsuits"). As of Dec. 31, 14 VIOXX Securities Lawsuits have been filed. In addition to the VIOXX Securities Lawsuits, as previously disclosed, shareholders have brought derivative lawsuits against the company. As of Dec. 31, six such lawsuits have been filed.

In addition, the company has received a demand from two shareholders that the Board take legal action against Raymond V. Gilmartin, chairman, president and chief executive officer, and other unspecified individuals for allegedly causing damage to the company through the allegedly improper marketing of VIOXX. Also, as previously disclosed, lawsuits asserting claims under the Employee Retirement Income Security Act (ERISA) have been brought against the company. As of Dec. 31, 10 such lawsuits have been filed. The company has filed a motion with the Judicial Panel on Multidistrict Litigation to transfer to a single federal judge and consolidate for pretrial purposes all federal lawsuits discussed in this paragraph (collectively, the "VIOXX Shareholder Lawsuits" and together with the VIOXX Product Liability Lawsuits and the lawsuits discussed in the next paragraph, the "VIOXX Lawsuits"). The hearing on this motion will be held on Jan. 27. (Related article: Merck board of directors decides to review Vioxx recall process)

In addition to the lawsuits discussed above, the company has been named as a defendant in actions in various countries in Europe, Canada, Brazil, Australia and Israel related to VIOXX.

Based on media reports and other sources, the company anticipates that additional VIOXX Lawsuits will be filed against it and/or certain of its current and former officers and directors in the future. (Related article: Vioxx recall lawsuits outside the United States)

As previously disclosed, there are investigations concerning VIOXX currently being conducted by the Securities and Exchange Commission, the U.S. Department of Justice and certain Congressional committees. Also, the District Attorney's Office in Munich, Germany has notified the company's subsidiary in Germany that it has received complaints and commenced an investigation in order to determine whether any criminal charges should be brought in Germany concerning VIOXX (together with the previously mentioned investigations, the "VIOXX Investigations").

Also as previously disclosed, the company has product liability insurance for claims brought in the VIOXX Product Liability Lawsuits of up to approximately $630 million after deductibles and co-insurance. This insurance provides coverage for legal defense costs and potential damage amounts that have been or will be incurred in connection with the VIOXX Product Liability Lawsuits. The company believes that this insurance coverage extends to additional VIOXX Product Liability Lawsuits that may be filed in the future. Certain of the company's insurers have reserved their rights to take a contrary position with respect to certain coverage and there could be disputes with insurers about coverage matters. The company currently believes that it has at least approximately $190 million of Directors and Officers insurance coverage for the VIOXX Securities Lawsuits and VIOXX Derivative Lawsuits, and at least approximately $275 million of insurance coverage for the VIOXX ERISA Lawsuits. Additional insurance coverage for these claims may also be available under upper-level excess policies that provide coverage for a variety of risks. There may be disputes with insurers about the availability of some or all of this insurance coverage. At this time, the company believes it is reasonably possible that its insurance coverage with respect to the VIOXX Lawsuits will not be adequate to cover its defense costs and losses, if any. (Related article: Litigators prepare for Vioxx class action lawsuits against Merck)

The company currently anticipates that one or more of the VIOXX Product Liability Lawsuits may go to trial in the first half of 2005. The company cannot predict the timing of any trials with respect to the VIOXX Shareholder Lawsuits. The company believes that it has meritorious defenses to the VIOXX Lawsuits and will vigorously defend against them. In view of the inherent difficulty of predicting the outcome of litigation, particularly where there are many claimants and the claimants seek indeterminate damages, the company is unable to predict the outcome of these matters, and at this time cannot reasonably estimate the possible loss or range of loss with respect to the VIOXX Lawsuits. The company has established a reserve of $675 million solely for its future legal defense costs related to the VIOXX Lawsuits and the VIOXX Investigations. This reserve is based on certain assumptions and is the minimum amount that the company believes at this time it can reasonably estimate will be spent over a multi-year period. In accordance with GAAP and consistent with Merck's practice, the company significantly increased the reserve when it had the ability to reasonably estimate its future legal defense costs for the VIOXX litigation based on both actual costs incurred as well as the development of its legal defense strategy and structure in light of the expanded scope of the litigation. The company will continue to monitor its legal defense costs and review the adequacy of the associated reserves. 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.

Recommended article: Merck vows to mount a strong defense in Vioxx class action lawsuits