investments discussion questions and student s reply
Discussion question
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?
student reply 1
1. Merck’s price fell significantly because shareholders were expecting the release of a new drug into the market by Merck, but instead there will most likely be lawsuits that will definitely affect the bottom line of the company. Not only will there be lawsuits, but having a drug go through the last stages of testing and it come out that it causes heart attacks and strokes looks very bad for Merck. It makes it look that Merck knew about the issue, but cared more about the money to be made than the harm it could cause the public.
2. He does have an obligation to the shareholders no doubt, but at the time the damage was done and the best way to move forward was to take the loss and build from there. If Vioxx had been pushed through production and out to the public then the repercussions would have been much worse. Withholding the information about pulling Vioxx would only have delayed the hit they took and most likely made it worse by looking to cover it up further.
3. Merck has to get ahead of all the negative publicity they will now face. They need to come out and take ownership for their mistake then say they are going to continue to research and produce drugs that make our lives better. Stock price may stay low for a bit, but when the next big drug breakthrough comes out in the news everyone will be back on board and wanting to buy stocks for fear of missing out on stock growth. The only way to truly come back is to mitigate the damage and make sure the next drug you come out with you have done your due diligence on and comes out with no snags.
Student reply 2
1. Why did Merck’s price fall so significantly?
Merck’s price fall significantly because having drugs increase the risk of suffering a heart attack or stroke. Merck’s may face lawsuits. Furthermore, it also will face challenges from expiring patents on successful drugs and the risky business of developing and marketing new drugs. Facing so many challenges, people will doubt the financial conditions of the company so the prices fall down.
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?
The CEO of Merck does have the obligation to maximize the value of these shares but it is not a good idea to withhold this information because as many patients have suffered the increased risk of heart attack and stroke because of the drugs, the information will disclosure from somewhere else. It will damage the company’s image and cause customers distrusting of their products if the CEO hide the truth.
3. How can Merck rebuild its share value after the Vioxx recall?
Merck’s should face all the challenges and restore its reputation. He can tell his customer that they are trying to find the reason why old drugs failed and develop a new drug that has a better effect. Once finished the new drugs, the stock share will increase.
Student Reply 3
1. Why did Merck’s price fall so significantly?
The price fell because of the successful drug, that proved to have major side effects. Instead they would be getting lawsuits from users who feel they may be harmed. This caused the price to fall.
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?
He made the right decision to pull the drug. No matter the negative effect, ethically it’s better to pull than to potentially cause major damage to people. Yes, the shareholders may get upset, but I think it was a good decision. It may have been legal repercussions for withholding that kind of information also.
3.How can Merck rebuild its share value after the Vioxx recall?
I think honest goes a long way. He can be honest with the public, and let them know what’s going, what it would take to fix, and what’s the next move. This reminds me of Tylenol pm, when it was recalled. It cost them alot but they took it off the shelves until it right, now it back selling again.
requirement: I need one discussion answer and three reply to those student. no word limit.
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