Merck admits Vioxx recall lawsuits liabilities possibility

After Vioxx recall, Merck is facing litigation in form of class action lawsuits claiming personal injury and securities fraud. In almost all cases, Merck has decided to take a very aggressive stance and the firm continues to pretend as if it has no Vioxx liabilities or any threats to its survival. In keeping with that spirit, the firm has refused to make any provisions for its Vioxx liabilities despite estimates by analysts that its liabilities could be as high as $38 billion, or even $55 billion.

On March 24, 2005, however, the Compensation and Benefits Committee of the Board of Directors of Merck provided that the pre-determined range of earnings per share ("EPS") established for 2005 for Performance Share Units ("PSUs") granted on February 22, 2005 may be adjusted to reflect the possible effects of the establishment of reserves for any potential liability relating to the VIOXX litigation. In other words, for the first time, Merck is at least admitting that there might be liabilities related to Vioxx litigation.

The company, in a filing with the Securities and Exchange Commission (SEC), says, "Merck has not established a reserve for any potential liability relating to the VIOXX litigation and has no present intention to do so. Merck establishes reserves for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated."

This attitude means that the firm may be caught totally by surprise if the jury awards damages to the victims in the Vioxx class action lawsuits. At that point, shareholders are likely to file even more lawsuits against the firm for not planning properly for potential liabilities. No wonder then that Merck's insurers are abandoning the firm and there is widespread speculation that the firm may go bankrupt.

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