A discussion

Discussion Questions

On the basis of interim results from a clinical trial, Merck pulled Vioxx off the market. The results indicate that patients who have been taking the drug for 18 months have twice the risk of suffering a heart attack or stroke than those taking a placebo. Vioxx had worldwide sales of $2.5 billion last year. While Merck’s action was generally lauded, critics argue that earlier studies indicated this issue as well. The stock market reacted swiftly, reducing the price from $45 to $33. Now Merck and its investors must brace for the inevitable lawsuits from those who believe they were harmed by the drug. Beyond the legal liabilities, Merck also faces challenges from expiring patents on successful drugs and the risky business of developing and marketing new drugs.

“Merck Pulls Vioxx From Market After Link to Heart Problems,” by Barbara Martinez and others, Wall Street Journal, Thursday, October 1, 2004, page A1.

1. Why did Merck’s price fall so significantly?

2. As CEO of Merck, Raymond Gilmartin made the decision to stop sales of Vioxx. Should he have withheld this information since it would have a clear negative effect on share price and he has an obligation to maximize the value of these shares?

3.How can Merck rebuild its share value after the Vioxx recall?

Solution Preview

Vioxx Recall

Despite the public lauding Merck’s decision to recall Vioxx, the stock price reduced from $45 to $33. The reaction is a clear indicator of the difference between consumers and the investors in a particular business. One of the possible causes of the fall in stock prices was the reduced demand for the stock on the stock exchange market. The company faced a challenging future in which it would have to deal with the legal issues presented by people affected negatively by the drug. Predicting such challenges made investors keep away from the stock, and such a reduction in demand led to a fall in prices.

(370 words)