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Economics

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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?

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Explanation & Answer

Attached.

Running head: VIOXX

1

Vioxx
Student’s Name
Institutional Affiliation
Date

VIOXX

2

According to the efficient markets theory, the price of a commodity is reflected by the relevant
information about the product that is available in the market. Therefore, the stock prices in the
market are set based on the performance scale of the organisation that is issuing the price. The
falling of Merck's worth can be attributed to several factors. One of the elements is the high risk
involved in investing in the company (Martinez et al. 2004). Currently, the company is facing the
risk of losing a lawsuit. If that happens, the company's financial position will immediately be
affected. The company is also facing the threat of low sales of its products. When sales drop, the
profitability of the company will be affected. The two risks will direc...


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