International investors turned wary on pharmaceutical stocks on Monday after a $253 million award against Merck & Co. Inc. (MRK) over its withdrawn painkiller Vioxx (search).

Drug shares were the biggest fallers on European markets as the verdict by a Texas jury set alarm bells ringing about product liability risk across the industry.

"It is going to impact the broader sector, especially in the near term. There is lots of litigation ongoing at the moment and it seems like the claims are going up," said Anne Marieke Ezendam, who manages a $24 million global healthcare fund at Threadneedle Investments.

"It wouldn't surprise me if pharma stocks fell back to the lows seen at this beginning of the year as people are reminded again just what the risks are," she added.

Europe's two biggest drugmakers, Britain's GlaxoSmithKline Plc (GSK) and Sanofi-Aventis SA (search) of France, fell 1.1 and 1.7 percent respectively, while the DJ Stoxx health index shed 0.9 percent.

Although the Texas award looks certain to be reduced under state law and other cases could yet go in Merck's favour, industry analysts said the judgment brought side-effect issues centre stage.

"It brings attention back to a lot of the risks in pharmaceuticals right now with regards to drug safety," said Gbola Amusa, an analyst with Sanford Bernstein in London.

He believes this could prompt U.S. regulators to clamp down further on drug advertising, possibly by imposing a one- or two-year ban on consumer promotion of new medicines.

That could be good news for the industry since excessive claims in adverts when a drug is launched may make firms more culpable if problems emerge later.

Merck pulled Vioxx off the market in September 2004 after clinical studies showed its long-term usage could double users' risks of heart attack or stroke.

That opened the door to negligence claims which analysts estimate could total as much as $10 billion to $25 billion.

Vioxx — a so-called COX-2 inhibitor which was widely used by arthritis sufferers — is not the only pharmaceutical with a tarnished safety profile.

Eli Lilly and Co., for example, recently reached a settlement for as much as $690 million with thousands of users of its schizophrenia drug Zyprexa, who alleged the product raised their risk of developing diabetes.

Other controversial products include antidepressants such as Glaxo's Paxil/Seroxat, which critics argue can increase suicide risk — a claim disputed by the manufacturer.

Dealing with such product liability cases has emerged as a integral and increasingly expensive part of doing business in the drugs industry.

In the biggest case to date, lawsuits over the diet drug combination fen-phen have cost U.S. company Wyeth more than $21 billion.

In a bid to head off future problems and pre-empt their critics, manufacturers have become more open about revealing research on their products via public Web sites.

Andrew Fellows of Pictet Bank's brokerage Helvea believes this may limit future liability claims, making Vioxx more of a company-specific than industry-wide issue.

"I don't get the impression that people (investors) are panicking," Fellows said. "There is a feeling that Merck acted a little bit irrationally, in as much they did promote the product very aggressively and may have not been as open with the clinical data as perhaps they could have been."

Still, those firms manufacturing COX-2 (search) drugs or developing new ones will need to tread very carefully.

Pfizer Inc., Merck's main rival in the COX-2 business, could yet face a legal onslaught, since its similar drug Bextra was withdrawn from the market in April, while Celebrex has been linked to cardiovascular risks in some trials.

Meanwhile, those companies with COX-2s in the pipeline — notably Glaxo and Novartis AG — will have to take a long, hard look at Merck's looming liability bill.

"Glaxo and Novartis will now have to evaluate whether it is worth bringing a new COX-2 out, if there is even a hint of a safety issue," said Premal Pajwani, an analyst with stockbroking and asset management firm Eden.