Outlook Murky

Please don’t listen to Ray Gilmartin, Merck’s chief executive officer, when he says the dividend of his once-great pharmaceutical company is safe. Please ignore the stock-analyst community, which is rallying behind Merck in a big way, telling you to take advantage of the drop caused by Merck’s pulling of the painkiller Vioxx because of its potentially lethal side effects. Please don’t read the articles that tell you that Merck will come through this whole because, after all, it’s a great American company, and great American companies always come back if you just buy and hold ’em.

Close your eyes and ears to the Merck sirens, because they don’t know what they are talking about. They are naïve. All of them. Because they don’t recognize that with the Vioxx debacle, Merck, overnight, has become the trial lawyers’ next big score, the next big bankruptable company out there. The Merck lovers don’t understand the vast powers of the mass-tort bar. They underestimate the power of the American judicial system to wipe out companies, innocent or guilty, for fatal mistakes. They don’t get that the plaintiffs have all the cards in these lawsuits and management has none. In fact, if I were the New York Stock Exchange, I would put a big skull-and-bones warning label on Merck’s stock that would say: “Warning—the security you are purchasing may end up worthless to you. All Merck stock bought after the recall of Vioxx might soon belong to those class-action plaintiffs who used Vioxx after the time when Merck knew that Vioxx may be lethal.”

You can’t blame management for putting on a good face. Gilmartin doesn’t want to frighten people or give ammo to his enemies. But, from the time I helped start American Lawyer more than 25 years ago, I have made a career of tracking—and betting with—the mass-tort bar. I have studied how it has bankrupted whole industries, taking down company after company, including those with only the most tangential exposure to, say, silicone breast implants or the making of asbestos. These guys are the masters of their domain; you can’t beat them. Now that the communist movement has dwindled to a handful of ne’er-do-well countries like Cuba and North Korea, the mass-tort bar has replaced Marxism as the most powerful countervailing force to capitalism worldwide. And until Merck came along with this Vioxx recall, they were just about out of deep-pocketed targets to bankrupt, having just finished off the makers, handlers, and insurance companies that represented anything having to do with asbestos.

I can tell you that without a doubt, Merck will be lucky to come out of this Vioxx nightmare as a stand-alone company, and will far more likely be reduced to a trust for abused patients and nothing more. In fact, the only thing that could save Merck is that some of the more jackal-like members of the tort bar could get distracted by the possibility of multi-billon-dollar suits against Marsh Inc. and other insurers and insurance brokers, courtesy of the spadework produced last week by New York attorney general Eliot Spitzer, and not pursue Merck with the abandon I anticipate.

Why does Wall Street consistently underestimate the power of the mass-tort bar? A couple of reasons. First, buy- and sell-side analysts still take their advice from the companies they follow, and unless a company has already been through the nightmare of the tort phalanx, it doesn’t know the horror that awaits it. Not me. I shorted A.H. Robins after it produced and then pulled the Dalkon Shield IUD because it caused sterility. The company assured everyone who would listen that there were no worries, the dividend was safe, the company stronger than Fort Knox. Turned out Robins was as solid as a sand castle. After a few years of battling, the tort bar forced Robins to declare bankruptcy. The company was ultimately sold for $3.1 billion to American Home Products, now Wyeth, with $2.4 billion placed in trust for the victims—not the shareholders.

“Merck has become the trial lawyers’ next big score, the next big bankruptable company out there.”

Aha, though—Merck says it never submitted false claims about Vioxx or engaged in any other “bad actor” behavior. My, how quaint, how downright Capra-like in its innocence, Merck is. Does Merck really think its conduct actually matters when it insisted for so many years that the drug was safe, despite multiple pushes from the FDA otherwise? I’ll bet you anything that somewhere in Vioxx’s five-year history, someone at Merck noticed the higher incidence of heart attacks for patients taking the drug and urged it to be pulled from the market. When that piece of e-mail is found, it will take some jury’s breath away in Jackson, Mississippi, or some other plaintiff-friendly location where companies are ritualistically slaughtered on the altar of tort jackpots, and the games will begin. In some ways, if the company didn’t notice the incidence of heart attacks, it might actually be worse for Merck, because the company, a hostile attorney might suggest, should have been staying on top of how patients who took Vioxx were doing. Either way, it’s a lose-lose for Merck.

And how good a case do the plaintiffs have? Let’s listen in to a bit of what juries will hear around the country: “Ma’am, is it true that your late husband had a sore elbow, took Vioxx, and died of a heart attack?”


“No further questions, your honor.”Imagine that happening thousands of times across the country. Thousands of times!

To be sure, Merck has one hope to avoid this sequence of pain. It needs a victory for President Bush so he can somehow rein in the trial lawyers who will otherwise bring these cases with abandon. Even then, though, if the wrong judge gets the big class-action case that will no doubt be certified, it won’t matter who’s president; Merck’s equity will take a pounding before it is ultimately handed over to those who took Vioxx for muscle soreness and then, alas, suffered a heart attack or died from the drug. Given that there have been 27,000 heart attacks among those who have taken it, and there were more than 2 million customers, courtesy of that Dorothy Hamill–Bruce Jenner aging-gold-medalist ad campaign, you have to think there won’t be much equity left for, say, the regular common-stock shareholders.

I wish this weren’t the case. I wish I could tell you, like so many on Wall Street claim, that the damage is “$6 billion tops,” or “capped at $10 billion.” But I know better. The damage is incalculable, and the culpability, despite Merck’s acting quite responsibly once it was obvious something was wrong, is just too easy for juries to understand. In other words, sell Merck now while you still have the chance. That $30 stock you see trading on the New York Stock Exchange will soon belong to a former Vioxx patient.

James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he was neither long nor short Merck.

Outlook Murky