Washington Editor

As drug development companies face a growing erosion of public trust, as evidenced by the massive monetary judgment against Merck & Co. Inc., the maker of Vioxx (rofecoxib), additional financial fallout from more lawsuits beg the question - could the pharmaceutical giant's mounting liabilities adversely impact its biotech partnerships?

It's possible.

"Merck's in real trouble," Andrew McDonald, analyst with ThinkEquity Partners LLC in San Francisco, told BioWorld Today, adding that "these lawsuits do quite a bit of damage to Merck's balance sheet going forward." That might limit them in the deals they can do, and certainly could curtail large acquisitions, but Merck's smaller dealings wouldn't be affected because "they're not very expensive."

McDonald, who follows some companies involved with Merck, allowed that the lawsuits "certainly don't help things."

But inside the Whitehouse Station, N.J.-based company, there is little visible worry. Janet Skidmore, its director of media relations, indicated that potential lawsuit payouts would not hinder existing and future drug development arrangements.

"Between 2003 and 2004, we executed about 100 alliances" of all sizes, she told BioWorld Today. "We're talking about agreements that run the gamut, from licensing agreements for compounds to technology transfers to research collaborations."

Those deals center on all types of research areas, from cancer to cardiovascular indications, and antivirals to Alzheimer's disease. Among the higher-profile deals Merck has struck with biotech companies in recent years include two multimillion dollar collaborations with Cambridge, Mass.-based Alnylam Pharmaceuticals Inc. on RNAi therapeutics for ocular and other applications, as well as a potential $346 million agreement with Bothell, Wash.-based Nastech Pharmaceutical Corp. on obesity.

More recent deals have surfaced. For example, Metabasis Therapeutics Inc., of San Diego, recently entered a potential $74 million partnership with Merck to develop small-molecule drugs to impact a liver enzyme called AMP-activated protein kinase for Type II diabetes, hyperlipidemia and obesity. That arrangement, disclosed two months ago, follows a previous partnership focused on hepatitis C, which began a year and a half ago.

"We have a tremendous amount of respect for Merck and its capabilities in drug discovery and development," Paul Laikind, Metabasis' president and CEO, told BioWorld Today. "But in terms of the effects of this liability issue, I wouldn't ignore it."

As of June 30, Merck had about $13 billion in cash, cash equivalents and short-term investments. For 2005, the company expects four of its products to generate sales that range from $2 billion to $5 billion apiece. And, as it is historically one of the top partnership options for biotech companies, the name Merck retains much of its luster.

"We just signed a second collaboration at the end of June, and the liability issues were plain to see at that point," Laikind said. "But I think Merck, and the industry a whole, sees biotech as part of a solution as products run into problems and go off patent." He added that Merck is "definitely among the top five or so companies out looking [for alliances], as well as one of the companies that we go look to."

Still, another analyst told BioWorld Today that the drug giant's potential lawsuit payouts could very well impact its collaborative relationships, old and new.

Other analysts said the firm, which a Texas jury last week found liable for $253 million, stands to lose many billions of dollars in those legal payouts, even if the original verdict is reduced to about one-tenth of its original size due to punitive damage limitation laws in the Lone Star State. Some think Merck's total liability costs could climb to $18 billion or beyond, with one high-water estimate reaching $50 billion. The company has acknowledged that is hasn't established any liability reserves, but has set aside $675 million for legal defense costs. To hedge against a dim outlook, it said that unfavorable outcomes could have a material adverse effect on its financial position, liquidity and results of operations.

Even with plans to appeal the Texas verdict, Merck still faces more than 4,200 lawsuits representing more than 7,500 plaintiff groups, numbers expected to grow as lawyers and potential plaintiffs examine the initial ruling, which demonstrated that Merck was culpable in a Vioxx patient's death because it failed to disclose prior knowledge of the COX-2 drug's cardiovascular dangers.

Bolstering such complaints that blame Merck for up to as many as 60,000 deaths, according to a class action group called LegalServicesInfo, the Associated Press has reported that Merck filed for patent protection on technology to reduce cardiovascular problems in COX-2 inhibitors a year before Vioxx got on the market. Merck, however, is sticking to its guns, and said it would defend each case one by one over the coming years.

"Merck acted responsibly," general counsel Kenneth Frazier said in a statement, "from researching Vioxx prior to approval in studies with almost 10,000 patients, to monitoring the medicine while it was on the market, to voluntarily withdrawing the medicine when we did."

The painkiller was pulled from the market almost a year ago. Before then, the company's shares traded in the mid $40 range; these days, the stock hovers in the mid $20s.

Vioxx's market withdrawal has had a measurable financial impact; Merck's second-quarter earnings per share dropped to 33 cents, well below earnings per share of 79 cents in the same period a year ago, although a dividend of 38 cents per share will still be paid. Worldwide overall sales fell 9 percent to $5.5 billion, which the company said reflects an 11 percent decrease related to the Vioxx withdrawal.

And, according to another analyst, all current and pending litigation is a distraction at Merck, from senior management to the scientists and all the way to the receptionist's desk. Time will tell if these impacts - measurable and immeasurable - trickle down to biotech firms.

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