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Why Merck Will Win Its Vioxx Supreme Court Case

Merck should expect to win when the U.S. Supreme Court takes the shareholder class action case filed against it over the Vioxx withdrawal.

Investors allege that Merck committed securities fraud because it hid knowledge that Vioxx was dangerous until September 2004, when it was withdrawn from the market because it caused too many cardiovascular problems in patients. Merck's stock dropped $12 that day.

The suit, however, is not about whether Merck hid data (it did). Rather, it's about whether investors should have been "on inquiry notice" because of "storm warnings" that Merck might have hidden data.

If investors want to prove a company committed securities fraud, they must file their suit within two years of discovering those storm warnings. Unfortunately for lead investor Richard Reynolds and his plaintiffs, they didn't file their case until November 2003, more than two years after the FDA issued Merck a warning letter, in September 2001, that accused Merck of misrepresenting Vioxx CV data.

That -- among others -- is the key fact that the Supremes will latch onto. Remember, it's a conservative court that favors elites and dislikes victims. Thus it will side with Merck, tightening the time window in which investors must file to recoup losses from stock fraud.

Here's the timeline as presented in the highly readable ruling of the Third Circuit Court of Appeals: 1996 and 1997: Internal emails demonstrate that Merck employees were aware that there was "a substantial chance" and a "possibility" of CV events that could "kill [the] drug."

March 2000: release of VIGOR results which showed better CV outcomes with naproxen over Vioxx. The court notes that investors found this information confusing, because it was impossible to tell whether naproxen had CV benefits for users or whether Vioxx was simply worse for CV events.

August 2001: JAMA published a study of Vioxx that raised a "cautionary flag" regarding CV events and Vioxx.

September 2001: The FDA issues Merck a warning letter. Its states: "You have engaged in a promotional campaign for Vioxx that minimizes the potentially serious cardiovascular findings that were observed in the [VIGOR] study, and thus, misrepresents the safety profile for Vioxx." The stock fell $4.16 but rebounded within a month.

October 2003: A Harvard study finds an increased risk of heart attacks with Vioxx.

November 2003: Reynolds et al filed their suit.

September 2004: Vioxx was withdrawn, and the stock dropped $12. "Securities analysts expressed their surprise at the suddenness of Merck's action," the ruling states.

The appeals court held that the FDA letter wasn't enough of a warning because Merck continued to make soothing noises about Vioxx after that, because the FDA is a drug regulator not a stock regulator, and because the proof didn't arrive until the 2003 Harvard study. "This study for the first time belied Merck's repeated assurances that naproxen was responsible for the disparity in CV events," the court wrote.

The Supremes won't buy that. They will look at the plain language of what was said at the time, and the FDA warning could not have been written any plainer:

"potentially serious cardiovascular findings ... misrepresents the safety profile for Vioxx."
Plus, around that time there was a raft of consumer fraud and personal injury suits that investors could have taken for warnings. Thus, expect a ruling in favor of Merck.
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