Minimizing the Mess at Merck

The drugmaker needs a new CEO with a battle plan to craft a legal strategy for Vioxx, cut costs, and bolster new products

By Amy Barrett

The fallout from Merck's (MRK ) Vioxx withdrawal continues. On Nov. 8, the drugmaker disclosed it had received a subpoena from the Justice Dept. relating to its marketing, sales, and research efforts on the painkiller. In addition, Merck said the Securities & Exchange Commission had begun an informal inquiry regarding Vioxx. The news comes as Whitehouse Station (N.J.) Merck confronts hundreds of lawsuits relating to the withdrawn treatment and a potential cost of billions of dollars in liability from the debacle.

With the Vioxx mess, it's now more likely that Merck's board will accelerate its search for a successor to Chairman and CEO Raymond V. Gilmartin. And increasingly, Wall Street analysts believe Gilmartin may step down ahead of his announced retirement in the spring of 2006. The stock price has been hammered, falling more than 40% since Vioxx was taken off the market Sept. 30. Merck yanked Vioxx after a company-sponsored study showed the risk of heart attack or stroke had doubled for patients who took the painkiller for more than 18 months.


  Merck's next CEO will likely come from outside the company and will be stepping into a major crisis. That person needs to move quickly to accomplish three things: Craft a legal strategy for the Vioxx problem, cut costs to adapt to a shrinking revenue base, and strike some deals to buttress the drug-development pipeline.

The most immediate task, of course, will be addressing the liability of Vioxx, which has been prescribed to more than 20 million Americans since 1999. Here, Merck has no easy answers. Wyeth's (WYE ) experience with its withdrawn diet drugs Pondimin and Redux should stand as a warning.

Wyeth believed it had struck a deal that settled diet-drug lawsuits with plaintiffs' lawyers. But the number of people who filed to receive compensation from the settlement far exceeded original estimates. Wyeth is trying to amend that settlement, but so far, the total bill for its diet-drug fiasco is close to $17 billion, which includes payments that weren't part of that broad settlement.


  The lesson for Merck is that it must prepare for a long and costly fight to resolve the Vioxx legal disputes. One analysis estimates the liability could be as high as $17.6 billion over the next decade or so. Earlier this week, Standard & Poor's warned it might downgrade its ratings on Merck's debt because of the huge payouts it could be forced to make.

That's why it's so crucial for Merck to bring its cost structure down. Not only has the drugmaker just lost a $2.5 billion blockbuster in Vioxx but it'll take another big hit in 2006 when the $5 billion cholesterol-lowering drug Zocor loses patent protection in the U.S. Since 2003, Merck has eliminated 4,500 positions as part of a cost-cutting drive. But it's likely that deeper savings will have to be found.

If Merck is to recover, it will also need to strengthen its weak pipeline of new drugs. Gilmartin had sworn off major mergers, arguing they don't help companies improve their productivity. But Merck needs to consider all dealmaking opportunities to fill the hole left by Vioxx and the upcoming loss of Zocor. One viable prospect is a merger with Schering-Plough (SGP ). Merck and Schering have a joint venture to market the cholesterol-lowering drug Zetia, and some analysts say a combination would help Merck lower its expenses while putting control of Zetia under one roof.

Such a move isn't a complete solution to Merck's woes. But continuing the present course isn't an option for the next CEO, either.

Barrett is BusinessWeek 's Philadelphia bureau chief

Edited by Beth Belton

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