Bad Medicine, Excellent Response

1 October 2004


Merck Pulls Vioxx over Cardiac Concerns

In a move that is going to cost the company $3 billion in sales every year, Merck & Co. has announced that it is voluntarily pulling its anti-arthritis drug Vioxx from the market. This is likely to hurt earnings to the tune of 50 to 60 cents a share, and it will give rival Pfizer’s Celebrex a huge boost. However, Merck made the right call – in cancer tests, Vioxx increased cardiovascular risks by 50%. As Hippocrates taught, “First, do no harm.”

There is very little in the way of a silver lining here. Merck does have a successor drug called Arcoxia on sale in 47 countries outside the US, and if it doesn’t carry the side effects of Vioxx, Merck still has an offering in the anti-arthritis space. But if Arcoxia also contributes to heart troubles, even this glimmer of silver will tarnish, and Merck will have more worries.

Merck CEO Raymond V. Gilmartin, said in a statement, “Although we believe it would have been possible to continue to market Vioxx with labeling that would incorporate these new data, given the availability of alternative therapies, and the questions raised by the data, we concluded that a voluntary withdrawal is the responsible course to take." This suggests Merck is pretty comfortable with Arcoxia’s chances of US approval, but it is also an acknowledgement that putting “may cause heart attacks” in the fine print effectively renders Vioxx an unlikely sale.

What Mr. Gilmartin’s company has done is a textbook example of cutting loses, taking the hit, and moving on – something very few businesses do well. Continuing Vioxx would merely waste marketing money (and a lot has been spent on Vioxx, making it a significant brand) while Celebrex and others that don’t carry the cardiac warning clean up. Pulling the product all at once, instead of some lame phase out or appeal to the courts, concentrates all the bad news for Wall Street to swallow in a single dose. This beats the death of a thousand cuts many firms undertake as they squirm away from bad news. Dr. Lester Crawford, the acting Commissioner at the FDA said, “Merck did the right thing by promptly reporting these findings to FDA and voluntarily withdrawing the product from the market." It is difficult to recall a time when a regulator gave such accolades to a firm facing bad news.

In pre-market trading, Merck’s stock fell 21%. At 9:00 Thursday morning, Merck held a conference call to answer all comers’ questions. This cannot have been easy. But it was transparent and honest. While the Kensington Review isn’t competent to recommend stocks, honesty and doing the right thing are easily spotted. Management at Merck is certainly trustworthy.

© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.

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