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On the basis of interim results from a clinical trial, Merck pulled Vioxx off the market. The results indicated 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. Merck and its investors braced for the inevitable lawsuits from those who believe they were harmed by the drug. Beyond the legal liabilities, Merck also faced challenges from expiring patents on successful drugs and the risky business of developing and marketing new drugs. (Key words: Efficient Capital Markets, Risk and Return)

1. Why did Merck's price fall so significantly? Try to incorporate concepts from session 4 and current session

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 had an obligation to maximize the value of these shares?

 

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