Merck, Vioxx, the moral of the lesson and how to align the incentives

I mentioned Merck's case in my previous post in relation to strategy (and the comments under that post). I was also aware that the verdict will be delivered in the next few days.

Today Merck was found liable for $253M for a Vioxx lawsuit. CNN said there are at least 4200 similar cases waiting on trial, many cases even stronger than this one. That would put the total liability to over $1000bn, not counting the non-death related suits. (In reality the punitative damage would not scale up in the same rate, but the total would reach $100bn, even without the punitative portion. )

Merck's market capitalization according to yahoo at this moment: $62bn (based on $28.25/share), net income $4.5Bn IN 2004, total asset $43bn.

With these numbers, Merck cannot afford the payment of $100bn even if it were to sell off the whole company (all future anticipated income based on market projection and discount rate), or twice its total asset. It would take 22 times its annual income to settle these suits, more for non-death related ones. This is no better than what the tobacco industry received. In fact, the fine for the tobacco industry, who is more guilty that Merck in any measure, has been significantly reduced recently. Where is justice?

Merck probably was not doing the right thing before it voluntarily withdrew Vioxx, or withdrawing it too late. I certain would not pity Merck had it continued to sell the drug knowingly before the fault was identified, like Pfizer did. But I am not sure whether the Merck's voluntary withdrawal of Vioxx and the related disclosure of information has adversely affected the verdict. If it does, it would be a sad news for all of us. Because Merck is punished for finally doing the right thing, or at least voluntarily stopped doing the wrong thing to contain the damage. If Pfizer, which has stood firmly behind its Celebrex and Bextra despite strong evidence against the COX-2 Selective Inhibitors (which include both Vioxx, Bextra and Celebrex), and even promoted its products by capturing the opportunity of Vioxx withdraw, emerges as a winner over the conscience struck (although belatedly) Merck, it would surely set a bad example for corporate America. Gilmartin's following Merck's mission statement might pay off in the longer term, as demonstrated in the last 100 years. But Gilmartin is also guilty of not enforcing such principles to his marketing ans sales team before the withdraw. But the judge and the government has the responsible to align the incentives and encourage corporation to do the right thing.

Based on the verdict, Merck was guilty at concealing some crucial facts before the withdrawal. It would be unfair to the patient or the public if Merck can get away with it. Is there a better solution to this dilemma? Yes, there is. This is what I would do if I were the judge

  1. Maintain the same verdict, and same amount of damage, but distribute the "punitative damage" of $229M to 3 parties: whistleblower, victim and a fund (e.g. 70%, 20%, 10%, with some flexibility by case)
  2. Whistleblower fund should be distributed to the company and the individual who helped to control the damage. In this case Merck and Gilmartin and team should be the among the recepients of the whistleblower award. In this particular situation perhaps the whilstleblower should recieved the bullk of the punitative damage awarded, if it is proved that without the proactive release of information by Merck and decision by Gilmartin, the case would not have even been made. This will ensure the act of correcting the wrongs are rewarded
  3. Even better, the well-behaved companies may be in a position to profit from their good deed. For example, if Pfizer is convicted in a similar lawsuit, Merck gets the share of whistlerblower award as well. Therefore, the "good" company might end up better off, if there are contrasting responses from these companies
  4. The fund (this would require legislation and government effort) would be used to reward companies which does the right thing in future, e.g. when it does not get compensated by punitative damage from a third company with wrong doing but refused to correct the mistake
  5. Now this is a competitive environment which encourage and reward compnaies that do the right thing


Edited to add (Aug 22):

This is another proof that WSJ reporters are much brighter than the editorial writers.

Op-ed today on "Vioxx Verdict" appears like a sponsored ad by the pharma industry.

It said "[The verdict is] bad news for other COX-2 pain relievers and drug reseach generally.....also bad news for the millions of Americans who suffer from the kind of chronic pain for which stomach friendly COX-2 inhibitors like Vioxx, Celebrex..."

  • How so? traditional NSAID (aspirin, ibuprofen), with side effect on the stomach (GI, or gastro-intestinal system), is now proved to be a good alternative to COX-2 inhibitors. Pharmacos do not like it because these are generic drugs and they don't make obscene profit from them
  • COX-2 themselves can still be applied to patient with no CV (cardio-vascular) risk. As for Bextra or Celebrex, they deserve it. If my proposal is adopted, Merck is going to benefit from suits agaisnt Bextra
  • For generally drug research, there is a golder opportunity to be innovative and find another blockbuster which will address both the GI and CV problems
  • The verdict only place a clear warning agaisnt deceptive sales and marketing methods which try to conceal the potential risks and side-effects. In the long term, it is going to boost patient's confidence on drugs, just SOX do to corporate accounting governence. All Merck has to do is to honestly tell the physicians and patients what the risks are, exactly like what they have correctly done last year this time
  • As the op-ed has noted, "earlier this year, an FDA advisory panel recommended that the drug go back on the market, with appropriate labeling"

The incompetent lawyers Merck hired are the ones to be blamed. As for the pahramcos, play by the rule and you will get rewarded.


Sun Bin said...

NYT has more about how much Merck knew before the withdrawal and why they lost the case

Sun Bin said...

The Economist as well. "The accepted practice in the drugs industry of not publishing bad test results has faced challenges of late."