It has been a bloody and bitter fight. Merck’s (MRK) pain killer Vioxx has been alleged to cause heart problems and worse. The drug hit the market in 1999 and was pulled in 2004. At that point the lawsuits began in earnest. The Wall Street Journal says that there were eventually 27,000 of them.

Now the paper says Merck "is expected to announce that it agreed to pay about $4.85 billion to settle a significant portion of the claims over injuries allegedly linked to its Vioxx painkiller."

But, it is a perverse decision and may not be a good one for Merck shareholders. The company had won several landmark cases which made it appear that it had the upper had over plaintiffs. Much like the Big Tobacco suits of the 80s, a strategy of winning and waiting the suits out would probably have prevailed.

Based on its legal spending on the matter in the last quarter, Merck has an annual cost to handle the Vioxx suits that is probably just over $600 million. The current settlement amount is over eight times that. And, it resolves most, but not all, of the cases. If the tobacco court cases of twenty years ago are any indication, Merck had a very good chance of another two or three years of litigation and then a positive resolution.

The argument will be made and should be made that there is a real liability for Merck if a large number of the Vioxx cases go against the company. That appears unlikely, but it has to be put down on the ledger when management looks at the pros and cons of a settlement.

Perhaps Merck’s management just wanted peace, to lay the litigation and bad PR to rest. But with its shares up 80% in the last two years, the market was showing it believed that the Vioxx problem would turn out OK.

And, that means Merck management did shareholders no favors.

Douglas A. McIntyre

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