Larry,
Cut out the bottom 12 inches of the rock (or however high you need to go). Snap a chalk line and cut it out. Then you can get the 3x5 sheets of 1/2" Durock. Cut them in 12x48 (so you hit the studs) and install them in the place of the rock you cut out. It's cement, so wont take water. and can be feathered in to match the remaining sheetrock.
Yeah, Bruce. But it's gonna be ugly work. I'll post some pics.
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