Business Analysis: The pharmaceutical industry counts the cost of the drugs that do not work

By Katherine Griffiths in New York and Damian Reece

The decision to award $253m (£141m) to a widow whose husband died after taking Vioxx might be good news for the thousands of people in the US, UK and elsewhere who suffered after using the blockbuster drug, but there remains a nasty after-effect for the drugs industry.

While drugs companies were yesterday still digesting the impact of Friday's decision in a court in Angleton, a small town in Texas, investors demonstrated clearly they feared the resounding verdict against Merck could kick-start a wave of litigation against major pharmaceuticals companies over other controversial drugs.

Shares in Pfizer, the world's largest drug maker, whose painkillers Bextra and Celebrex are similar to Vioxx, fell 33 cents to $25.55 on Friday, while Eli Lilly closed down 5 cents at $52.57.

In Britain analysts were busy assessing the implications for GlaxoSmithKline, which faces concerns on both sides of the Atlantic over its antidepressant Seroxat, and AstraZeneca, which has been criticised by consumer groups in the US over its cholesterol drug, Crestor.

Mike Ward, an analyst at Code Securities, which specialises in the pharmaceuticals industry, said: "The drugs industry has always been a pretty risky industry. Vioxx has moved the goalposts a bit. It has been on the market for a while and it has been pulled having built up a $2.5bn franchise. The judgment has sent shivers throughout the rest of the industry.

"What happened over the weekend is a fallout from that. People thought there was a risk of Merck losing this case, but what took people by surprise was the size of the award of $253m punitive damages. It was much bigger than people thought."

Vioxx, a painkiller aimed at those suffering from arthritis, was taken by 20 million Americans and many in other countries before it was withdrawn on 30 September last year after Merck said a study had shown the drug increased the risk of heart attacks or strokes. Merck, whose shares plunged 8 per cent on Friday after the verdict in the first Vioxx case, immediately vowed to appeal against decision. It added that it was considering putting Vioxx back on the market to reinforce its belief that the drug helps millions of people.

Yet Mark Lanier, the high-profile Texan lawyer who tried the case - over the death of Robert Ernst, a 59-year-old marathon runner who died after taking Vioxx for eight months - said the number of people likely to file suits against the drugs giant was already increasing.

According to various Wall Street banks, Merck will have to pay between $5bn and $50bn in total compensation to victims who have suffered adverse side-effects from taking Vioxx, and faces the prospect of 10 years of legal wranglings.

David Moskowitz, an analyst at the research house Friedman, Billings, Ramsey, said that because of a combination of its exposure on Vioxx and its lack of new drugs in the pipeline, "we think investors who own Merck should be selling the stock. This is fundamentally a very weak company".

But the judgment could have a longer-lasting effect on the industry, making it more conservative in its approach to developing new treatments and also changing the way drug companies approach the sale of drugs.

"It may make them more wary in terms of how they push their products," Mr Ward said. In the US drug companies have been able to sell direct to consumers, and have advertised on television since 1997, spending $4.3bn a year on commercials. "It's a bit of a double-edged sword," Mr Ward said. The high-profile ads inviting people to buy the drugs, even with warnings of side-effects, can play into the hands of lawyers seeking easy litigation targets.

The industry is also worried that the risk-reward balance to drug development is now out of kilter.

A spokesman for the Association of the British Pharmaceutical Industry said: "The challenge is to acknowledge there is a contract between the industry, regulators and health services which recognises there is a trade-off between benefits and risks. This raises the debate about what that contract is exactly."

Of course the blow to Merck's reputation could be more serious than the final bill it faces from the litigation. David Graham, a scientist at America's Food and Drug Administration, who attracted international attention last year when he said Vioxx had contributed to the death of about 140,000 people, said yesterday the jury's decision was "an indictment of the essence of the company. The jury said Merck knew what it was doing and went ahead and did it anyway".

Dr Graham's views have been dismissed by many in the drugs industry. But they privately admit they are more concerned about a radical change of attitude by the regulator than by the risk of widespread litigation over other drugs.

The FDA has already swung to become more cautious since the outcry over Vioxx, taking longer to approve drugs, according to many in the industry. This year it has requested that GlaxoSmithKline suspend tests on an experimental drug to treat multiple sclerosis while it investigates the deaths of several patients this year after they took Tysabri, an MS drug made by Elan and Biogen Idec.

While the drugs industry has taken a knock over Vioxx, some of its most senior members have expressed frustration that the increased priority over drugs safety has eclipsed the importance of innovation and discovering new treatments - which often comes at the risk of unknown side-effects. Sir Tom McKillop, who recently announced his retirement from AstraZeneca, told The Independent in October: "I believe we are going in the wrong direction and in that sense I feel more frustrated. There is almost nobody speaking up for the real benefit that comes from innovation and the way that can advance society, create social well-being and health."

Controversial treatments that the lawyers have their eyes on

Pondimin

The litigation that has engulfed Pondimin's maker, Wyeth, formerly American Home Products, is the nightmare that Merck desperately hopes to avoid. Pondimin was part of a combination diet treatment and was withdrawn in 1997 over health problems including heart disease and hypertension. Wyeth has since spent $22bn settling lawyers' bills and claims from 120,000 sick patients.

Baycol

Drug company legal experts have criticised Wyeth's approach to defending itself against users of its treatments, claiming it agreed payouts too easily. Lawyers cite Germany's Bayer as a good example of how to win early trial victories and limit liabilities. Its cholesterol treatment, Baycol, was banned in 2001 after being linked to fatalities and muscle-wasting diseases. It has paid out $1.1bn in 3,000 cases.

Rezulin

When Pfizer acquired Warner Lambert in June 2000 it also acquired a headache in the form of Rezulin, a diabetes treatment that has been the subject of class action lawsuits brought by some of the 17 million Americans who suffer from Type 2 diabetes. Analysts reckon total Rezulin settlements have cost $1bn. The drug was voluntarily withdrawn in March 2000 after newer medicines became available.

Propulsid

Johnson & Johnson was forced to pull its heartburn medicine in 2000 after it was linked to 300 deaths and 4,000 cases where users claimed ill health. The US Food & Drug Administration warned Propulsid could cause death. The company put forward a $130m settlement in 2004 but that did not include 12,000 people who had yet to file lawsuits. Analysts reckon the total cost to the company is nearer $1bn.

Zyprexa

After Eli Lilly lost its patent for its blockbuster Prozac in 2001, Zyprexa became its best-seller. But the antipsychotic pill has opened up a new raft of claims from patients, many of whom are schizophrenic, who claim the drug has brought about diabetes-related injuries. In June Eli Lilly offered to settle claims from 8,000 patients for $690m, six months before the first Zyprexa trial is due to be heard in New York.

Paxil

Last August a report from US regulators making a link between Paxil - GlaxoSmithKline's antidepressant - and an increased risk of suicide in teenagers was made public. The news shocked GSK shareholders, and there were class action lawsuits from investors who alleged it had improperly concealed evidence. GSK is thought to have lost £200m of sales. Its UK version, Seroxat, is also under scrutiny.