Over the years, Merck & Co. built an enviable reputation not just as a paragon of the pharmaceutical industry but as one of America’s most admired businesses. The company produced medical breakthrough after medical breakthrough, engaged in extensive philanthropy, and instituted progressive human resource policies, all the while delivering stellar financial performance. And yet, after withdrawing its blockbuster drug Vioxx in September of 2004, Merck found its reputation and its financial stability in danger. The day after the announcement, Merck’s stock plunged 30% and a few analysts even wondered if Merck would be forced into bankruptcy.
What scared investors was the legal liability facing Merck. Over 20 million people in the United States had taken Vioxx during its four years on the market, creating a huge pool of potential claimants. Matters were not helped by front-page stories that appeared after the withdrawal, claiming that Merck knew of Vioxx’s hazards well before the drug’s recall. Within three years, 45,000 plaintiffs brought 27,000 lawsuits against the company.
In response, Merck argued that it had done nothing wrong. The company took an aggressive legal stance and announced that it would try every single lawsuit against it. In addition, Merck said it would fight any effort to tie the cases together in a class action and would not negotiate a universal settlement.
Nearly three years later in the summer of 2007, Merck had stabilized considerably. Shareholder fears of an imminent collapse eased and stocks climbed to pre-Vioxx withdrawal levels. The company had won eight of the thirteen suits that had gone to verdict and was appealing those verdicts it had lost. However, the strategy of trying every case had cost over $1 billion in legal fees. Furthermore, judges, who were facing the enormous backlog of cases still to be heard, were putting pressure on Merck to settle with the plaintiff’s bar. Should Merck go back on its strategy to try every case? And if the company agreed to negotiate, for what terms should it settle?
Published Date: 21/01/2008
Suggested Citation: Jaan Elias, Spencer Hutchins, Andrea Nagy, Constance E. Bagley, and Douglas W. Rae, "Merck and Vioxx (A)," Yale SOM Case 08-016, January 21, 2008.