Has Merck Suddenly Lost the Ability to Count?

August 15, 2008

In my look at the argument of drug companies who say they cannot estimate their legal liabilities, it struck me that at least one of those companies — Merck — has a history of actually being quite good at just that.

You’ll remember back in 2005, one analyst estimated that Merck’s legal bill for Vioxx might reach $50 billion. Take a bow, David Moskowitz of Friedman Billings Ramsey. Moskowitz later lowered his estimate to $18 billion, and then $12 billion, thus proving that analysts aren’t good at estimating drug companies’ potential legal bills.

But does this mean that the companies themselves don’t have a handle on it?

No.

Take a look at what Merck itself did over the Vioxx legal battle time period. First it set aside just $675 million for its legal bills.

Then it fought a few cases and demonstrated that plaintiffs weren’t going to win them all. The losses cowed the plaintiffs’ bar and they entered settlement talks. Merck escaped by paying just $4.85 billion to settle the whole thing.

In this light, Merck’s sudden claim that it is not very good at accounting for potential future legal losses doesn’t look that strong.

It looks to me as if Merck’s management is actually a bunch of geniuses at such estimates — they were the only people who believed and acted as if the Merck mess was going to be a lot smaller than everyone else thought it was, at least financially.

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