Product Liability Litigation: An Issue of Merck and Lawsuits Over Vioxx - The Short Version

Abstract

Merck & Co., Inc. pulled Vioxx, a $2.5 billon a year nonsteroidal anti-inflammatory drug, off the shelf in September 2004. The removal followed a study that was published reporting Vioxx increased the risk of cardiovascular events after long-term use. In the years since then, many lawsuits have been filed against Merck. This paper examines the incentive to recall a product and the effects of Merck pulling Vioxx from the shelves. Using the market’s expected internal rate of return for Merck, I calculate the expected profits from future Vioxx sales. I then use data on financial effects to show how the market value of Merck reflects their probability of winning legal cases concerning Vioxx.

Keywords: pharmaceutical, recall, internal rate of return, event study

JEL Classification: G0, G13, G14, G31