Why Merck Raised Those Vioxx Reserves

Call it the Vioxx vig. The drugmaker, which recently boosted its litigation reserves by $210 million, to $810 million, has to pay interest while appealing cases it loses. That's not a new concept, but in New Jersey, this includes pre-judgment interest. In other words, if Merck loses a case and appeals, the meter is running from the time a case was filed, not the date of judgment.

For instance, a jury last year ordered Merck to pay John McDarby and his wife $13.5 million in punitive and compensatory damages, and attorneys' fees. The decision was upheld earlier this year. But the case was filed in February 2005. Thanks to interest costs, the tab is now $15.75 million, according to the order signed this week by NJ Superior Court Judge Carol Higbee. (There's no interest on punitive damages or attorneys' fees, however).

Through the end of the year, Merck must pay 6 percent interest each day. And the rate is reset at the beginning of each calendar year, on the assumption that further appeals will continue for at least another year or two. In other words, Merck could wind up paying much more than the $13.5 million judgement if it ultimately loses.

Now, multiply that times any number of losses - and remember, there are approximately 16,400 Vioxx lawsuits in New Jersey - and suddenly, the potential liability grows much larger. Of course, there's another key reason the reserves were increased - Higbee wants to accelerate the number of cases to be tried, which means Merck must pay for more discovery costs, among many other expenses.

Wall Street, meanwhile, continues to believe Merck has gotten a handle on its Vioxx defense strategy, which amounts to litigating each and every lawsuit. But rack up enough losses in New Jersey - at trial and on appeal - and the liability may wind up being much larger than some people may realize.