I was shocked by the $253.4 million verdict announced yesterday for the first Merck (MRK) Vioxx trial. I’ve never heard of any one death resulting in even close to $100 million in damages. I am sure that Robert Ernst, a 59-year-old Wal-Mart produce manager, was well loved but did his death really cause his wife Carol Ernst over $253 million in damages. What was this Texas jury thinking?
According to AP, the jury wanted Merck to listen and that larger studies are needed for drugs. Would they also like to pay more for their drugs too?
Derek Lowe over at Corante’s In the Pipeline made a great comment on the size of the award. He commented, “If you’d like a strictly utilitarian, economic response to that award, start by pricing out what $253 million dollars of life insurance will cost – that is, if you can get anyone to not hang up the phone on you.” I thought that was a fairly insightful way of looking at the economic reasonableness of the damage award.
Another way to look at this is to consider that there about 4,200 additional claims against Merck. If each of these claims resulted in similar damages to those for the death of Robert Ernst, the total liability resulting from Merck’s Vioxx debacle would reach over $1 trillion dollars! Looking at that total potential liability, you would think Merck caused a nuclear meltdown disaster in a major city. I understand that the purpose of punitive damages is to send a message to the company that it should be more careful before it releases a potentially lethal drug. However, this measure of damages goes above and beyond this message. The repurcussion of this financially crippling award (not to mention the attorneys’ fees Merck will have to shell out over the next few months/years) may very well be that the cost and availability of other life-saving drugs will be put in jeopardy.
Imagine if Carol Ernst actually got 66 percent of that award, or $152 million. She would instantly become a member of the top 1 percent of the wealthiest people in the U.S. She would also have a heck of a time managing her money to avoid buying Merck stock, since Merck is standard component of many stock indexes and mutual funds. Every scam artist, charity, and financial planner will be hounding her day in and day out for the rest of her life. Even if she gets a smaller award, I hope she and her family are prepared for tremendous stress and turmoil that any windfall will cause them. God forbid that she or her family members will ever be in need of any Merck drugs. This includes any drugs that they could have been able to produce had they not faced tremendous financial liability.
I know it is likely that on appeal the damage award will be reduced substantially or even thrown out. However, the jury’s verdict does affect my estimate of the potential total financial liability Merck will face as a result of Vioxx. I originally felt that it was very unlikely that the total damages from Vioxx could exceed $10 billion; however, I’m not so confident now. I will also be a lot more cautious in the future when looking for value investments in companies with medical liabilities. I think I remember Charlie Munger also recently warning of the dangers of huge legal costs associated with medical liabilities. I should have taken his warning a bit more seriously. Maybe that is why we haven’t seen Warren Buffett and Charlie Munger investing in depressed stock of drug companies. For now, I will be holding on to the Merck stock I purchased last year, and I’ll be waiting to hear how the appeal of this case turns out.
I learned a few other important things from this event. These include:
- If I need an attorney for a jury trial, I would hire a Christian minister or reverand like Mark Lanier, who is an ordained Baptist minister. (Now if I could only invest in a law firm specializing in providing attorneys that are Christian ministers. Now that is a competitive advantage that would give a firm a wide moat.)
- I need to learn how to make PowerPoint presentations as effective as Mark Lanier using the techniques he used that are detailed in the book Beyond Bullet Points written by Cliff Atkinson.
- Never underestimate the power of persuasive speaking even when the facts do not appear to support an arguement. Emotions are often much more powerful than reason. As value investors, we want to focus on rational reasoning, but we have to remember that emotions play a much larger role in the decision making of many around us.