Merck & Co. has agreed to pay $688 million to settle two long-running lawsuits brought by investors who alleged the drugmaker delayed releasing bad news on its blockbuster cholesterol drugs to prevent a drop in sales.
Merck, the world's third biggest drugmaker by revenue, said Thursday that it agreed to the settlement because it's in the best interest of the company and current shareholders. It is taking a charge of nearly a half-billion dollars against 2012 earnings.
The delay in releasing results of a study that was meant to bolster sales of pricey cholesterol pills Zetia and Vytorin triggered criticism by analysts, investors, some scientists and the media - and ultimately an investigation by Congress.
The maker of Januvia Type 2 diabetes pills and the Gardasil vaccine against sexually transmitted cancers admitted no wrongdoing. The deal must be approved by a federal judge.
"The settlement gets a cloud out of the sky for Merck," said Erik Gordon, an analyst and professor at University of Michigan's Ross School of Business.
The settlement is among the top 25 securities class action settlements ever, according to Bernstein Litowitz Berger & Grossmann LLP, co-lead counsel in the litigation brought by a number of large pension funds.
Merck, which is based in Whitehouse Station, N.J., said in a statement that it's taking a charge of $493 million. The company also restated previously reported financial results, reducing its 2012 fourth-quarter results to 30 cents per share from 46 cents per share, and its 2012 results to $2 per share from $2.16 per share.
Merck shares fell initially but closed up 4 cents at $41.19, near the middle of their 52-week range of $36.91 to $48.
Merck and its then-partner Schering-Plough, which it later acquired, for about two years had delayed disclosing results of the study, known by the acronym ENHANCE. It tested how well Vytorin and Zetia reduced plaque buildup in neck arteries of patients with high cholesterol. The drugs had already been on the market for a few years, and together generated a combined $5.2 billion in 2007 alone.
The study was intended to give the pills a bigger edge over rival medicines in the nearly $40 billion-a-year global market for cholesterol drugs, by showing that besides reducing bad, or LDL cholesterol, the pills prevented it from clogging arteries - and presumably from causing heart attacks and strokes. But imaging of neck arteries of ENHANCE study participants showed that Zetia and Vytorin, which combines Zetia with a generic version of Merck's older cholesterol pill Zocor, didn't work any better than cheap generic Zocor did alone.
When Merck in early 2008 finally released the ENHANCE study results, Merck stock tumbled, causing big losses for investors, and sales of the two pills declined in the U.S.
Bernstein Litowitz, Grant & Eisenhofer and other law firms representing pension funds in the U.S. and elsewhere that held Merck and Schering-Plough stock then filed suits against each of the companies. Under the settlement agreement, Schering-Plough, which became part of Merck in 2009, will pay $473 million, and Merck will pay $215 million. A Merck spokesman said the company expects insurance to cover part of the total, reducing Merck's liability to the $493 million for which it's taking a charge.
Edward Jones analyst Judson Clark said the settlement is "largely a non-issue for long-term equity investors."
However, he added, "The combined number was probably a little higher than many investors were expecting and that's reflected in today's price movement."
Merck said in a statement that "numerous clinical trials conducted over the years have demonstrated a strong relationship between lowering LDL cholesterol and reduced risk of cardiovascular morbidity and mortality."
It added that its ongoing IMPROVE-IT study, an 18,000-patient study of Vytorin, should answer the question of whether lowering LDL cholesterol to very low levels with Vytorin could reduce heart attacks and strokes more than generic Zocor alone could do.
However, during a conference call two weeks ago to review fourth-quarter results, Merck executives would not reassure nervous analysts that the IMPROVE-IT study will show that benefit. Merck stressed then that it has numerous drugs in late-stage development and plans this year to file for approval of five of them. Still, two analysts quickly downgraded their ratings on its shares, one from "Hold" to "Sell" and the other from "Buy" to "Hold."
Analyst Les Funtleyder, a health care strategist at private equity fund Poliwogg, said the settlement news "will get lost in concern over" Merck saying recently that it will delay for about a year plans to apply for approval of a crucial new osteoporosis drug, odanacatib, while it waits for additional study results.
The settlement comes less than three weeks before the case was to come to trial. It had been scheduled to begin on March 4, before U.S. District Judge Dennis M. Cavanaugh in Newark, who must approve the settlement.
Last February Merck settled another lawsuit over delay of the ENHANCE study results by agreeing to more promptly report research results to investors and patients. The company's research division must give an annual report to the board of directors on any delays over a year in publicly disclosing results of patient studies. Merck also agreed to pay about $5 million to cover expenses of the retirement plan that brought the lawsuit.