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Raymond Gilmartin

No doubt Merck & Co. (MRK) Chairman and CEO Raymond V. Gilmartin would prefer to forget 2004, when the drugmaker had to withdraw Vioxx -- its painkiller that was hauling in $2.5 billion in annual sales. But while last year was tough, Merck will be paying the price for the Vioxx disaster for years to come.

Although critics had been warning for years that Vioxx might be dangerous, Gilmartin and his team had argued the drug was safe, and they continued to promote it aggressively. But in late September, a Merck study confirmed the drug raised the risk of heart attack and stroke. Merck is facing hundreds of lawsuits over Vioxx and is likely to get hit with many more. Sanford C. Bernstein & Co. (AL) analyst Richard T. Evans warns that the legal liability could exceed $25 billion.

A bill that high will limit Merck's financial flexibility. While Gilmartin has stepped up the pace of licensing and product acquisition -- striking about 50 licensing deals in 2004, up from just 10 in 1999 -- it may be too little, too late. In 2006 the company will lose U.S. patent protection on its $5 billion cholesterol-lowering drug Zocor. And while Merck has some interesting products in its pipeline, they're unlikely to be large enough to offset the loss. No wonder Merck's stock is off about 30% since the Vioxx withdrawal.

Gilmartin has also resisted the industry trend of drug-company megamergers. While there is no evidence those deals improve research and development productivity, they do offer cost savings opportunities and new products to help companies manage through lean times. And while Merck could have done a deal years ago from a position of strength, its weak stock price and likely huge legal liability now make it an unattractive partner.

With the 63-year-old Gilmartin preparing to retire in the spring of 2006, Merck's board has started searching for his replacement. Some disgusted investors would like to see Gilmartin step down early. But in the wake of the mess, directors may struggle to recruit someone to fix the ailing drugmaker.

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