Will Merck Fare Better in New Jersey?

Stock Watch
By Mark Glassman Published: August 25, 2005

MERCK (MRK) MESSED WITH Texas and lost. Last Friday, an Angleton, Texas jury ordered Merck to pay $253 million to the family of a man who died after taking the painkilling drug Vioxx. Although that award is likely to be reduced because Texas limits punitive damages, the verdict sent Merck's stock plunging 8% on the day.
And that was just the first Vioxx award. With more than 4,000 trials still on Merck's docket, and with Merck's legal strategy in question, investors are wondering how much more pain is in store.

Analysts and lawyers say it's premature to throw in the towel. The outcome of the next several trials might be just as important in shaping perceptions of Merck's long-term liability as the Texas case was.

The next trial is set to begin with jury selection next month in New Jersey. The plaintiffs in the case are Frederick Humeston, an Idaho resident, and his wife. Humeston, 60, had a heart attack in 2001 after taking Vioxx to manage pain in his knee.

"The stakes are huge," says Howard Erichson, a law professor who studies mass torts at Seton Hall University's School of Law in South Orange, N.J. "The national media attention undoubtedly is going to be less [in the New Jersey case] than what we saw in the Texas case. But to a mass tort defendant [like Merck], what sets up the litigation is not a single trial, but a series of early trials. Merck has to be feeling a lot of pressure now to win this second case. There's a big difference between being 1-1 and being 0-2."

And, at least at the outset, it looks like Merck's chances are much better this time around.

First, consider the venue. Ask any Basking Ridge businessman or Laredo cowboy: New Jersey and Texas are a lot farther apart than the 1,300 or so miles that separate their borders. Texas is a friend to the little guy, a foe to complex legalese and a notoriously difficult environment for defendants in corporate litigation. It was in Texas that a jury awarded the family of a woman who died $1 billion in a case against Wyeth (WYE) in April 2004, after its diet drug fen-phen was linked to heart-valve injury. "Unless you're talking about Mississippi, anyplace is more favorable than Texas," says Scott Henry, an analyst with Oppenheimer & Co. in Boston. (Henry doesn't own shares of Merck; Oppenheimer doesn't have an investment-banking relationship with the company.)

Jon LeCroy, an analyst at New York-based brokerage Natexis Bleichroeder, says Texas lawyers are familiar with how best to exploit the state's population during jury selection. "In Texas, [prosecutors] tend to pick venues with high unemployment. Typically in those type of areas, you get more sympathetic juries that are more anti-big-business. In Jersey, you have a more educated population. You also have a more pharma-familiar population." (LeCroy doesn't own shares of Merck; Natexis Bleichroeder doesn't have an investment-banking relationship with the company.)

And New Jersey is a breeding ground for pharmaceutical companies. At most dinner parties, you could play a very short game of "Six-Degrees-of-Bristol-Myers-Squibb." Merck's Whitehouse Station headquarters is about 120 miles northwest of the Atlantic City courtroom where the trial will take place. Its reception is sure to be friendlier there than in Texas.

Even if the New Jersey jurors aren't tangentially connected to Merck or other pharmaceutical companies, they might be squeamish about raiding the coffers of such a large state employer. New Jersey is slated to lose more than 5,000 civilian jobs from the military base closing at Fort Monmouth, about 50 miles from Merck's headquarters. Roughly 8,000 people work for Merck in the state.

Another difference between the Texas trial and the New Jersey trial is the plaintiff. In Texas, the widow of a man who suffered a heart arrhythmia and died after taking Vioxx took the case to court. In the New Jersey case, the plaintiff, Frederick Humeston, had a heart attack after taking the drug. Vioxx was explicitly linked to heart attacks, a fact that could increase the chances that the company will be found liable. But unlike the victim in Texas, Humeston didn't die. "In this case, this gentleman is still there to testify," says C. Anthony Butler, an analyst with Lehman Brothers. That might work in Merck's favor if damages are ultimately awarded. (Butler doesn't own shares of Merck; Lehman Brothers has a non-investment-banking relationship with the company.)

What does all of this mean for Merck's stock? LeCroy, of Natexis Bleichroeder, says investors can find some upside as the legal drama plays out in New Jersey and afterward, case by case. "Whenever you get a big verdict, you can make money by buying it soon afterward and holding it for a few months," he says. "Typically, on wins, the stock doesn't move a lot, but without a big loss, over time the stock moves upward." But he cautioned that this can be a dangerous game. "You're always at risk of the next big award."

And with more than 4,000 cases to go, it'll be a long game.