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Too bad



stab at an antidepressant didn't make the cut.

Longtime shareholders could probably use one right now. After soaring for years along with the popularity of blockbuster painkiller Vioxx, Merck stock has collapsed to seven-year lows following the drug's sudden withdrawal last fall.

But analysts warn that Vioxx won't be the last drug to cause the New Jersey company pain. Looking ahead to next year, Merck faces a patent expiration on an even more important medicine: cholesterol cutter Zocor, which is responsible for roughly 20% of the company's annual revenue.

To be fair, Merck plans to roll out a few new vaccines over the next couple of years. But the company has no real blockbuster developments in sight. Moreover, the once-proud drug giant has reacted to a string of setbacks in part by slashing costs and planning its biggest-ever round of layoffs -- leaving it with fewer employees to help find the next big cure.

Investors are crying out for answers. They want to know why Merck has faltered so badly and what, if anything, the company can do to cure its ills and regain its former strength. Most of all, many are demanding new leadership that will help Merck turn the page on a most disappointing chapter.

In the final installment in its five-part series examining Merck's Vioxx saga,

takes a look at what the future may hold for the giant company, embattled CEO Ray Gilmartin and a board that could find itself coming under increasing scrutiny.

Labor Pains

To be sure, Merck was hurting even before the Vioxx recall.

Take that failed antidepressant, for example. The drug was supposed to be a blockbuster itself but instead wound up abandoned -- along with three other treatments -- at a late stage of development in 2003. Suddenly, Merck found itself shedding thousands of employees in an effort to meet financial targets and make up for its failures.

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It lost world-class scientists like Emilio Emini -- responsible for one of its upcoming vaccines -- during that time frame. Emini's new employer, the International AIDS Vaccine Initiative, quickly boasted of its catch.

"Dr. Emini led the Merck team that developed one of the first highly effective antiretroviral agents for the treatment of people living with HIV," the organization announced a year ago. And he "was responsible for Merck's overall basic vaccine research program including diseases other than AIDS."

Emini ended a two-decade career at Merck when he left the company. And he is just one of many talented scientists who are now gone.

Meanwhile, CEO Gilmartin -- trained in engineering and business rather than medical science -- remains. But some clearly disapprove of that arrangement.

Bear Stearns analyst Joseph Riccardo is among the crowd calling for a new CEO. Riccardo blames Merck's strategy, carried out during Gilmartin's reign, for "the predicament they are in now." Gilmartin entrusted Merck's own scientists to develop blockbuster drugs that failed to pan out. Riccardo, for one, believes the Vioxx scandal has simply complicated matters.

"The greatest risk to Merck is management succession and not Vioxx," wrote Riccardo, who has a peer perform rating on the company's stock. But "getting a talented CEO will be difficult with Vioxx liability."

Still, people like Riccardo and Morgan Stanley analyst Jami Rubin clearly want the company to try.

"We hope the board of directors acts boldly," Rubin wrote, "and hires a CEO from outside the company with considerable experience managing a company in a difficult environment."

Vioxx Headache

For now, however, the board continues to support Gilmartin and seems more focused on the Vioxx issue instead.

Last month, Merck announced that six of its directors will be serving on a special committee established to review the company's actions prior to the Vioxx recall. Merck suddenly withdrew the drug last September -- after aggressively selling it for five years -- because of cardiac risks. Previously, the company had criticized those who linked Vioxx to heart problems.

"The committee will have the complete cooperation of Merck management and the full resources it needs to conduct its assessment," Gilmartin pledged. "Merck management looks forward to the results of the special committee's review and is convinced that it will show that the company acted responsibly and appropriately."

Still, the company will be relying on board members, including two medical doctors, who themselves failed to expose Vioxx's dangers until the end. Samuel Thier is a Harvard medicine professor who once ran a health care system known for its premier research unit. William Kelley has a similar, if somewhat blemished, record. As CEO of the University of Pennsylvania Health System, a local publication reported, Kelley scored credit for "building Penn's research juggernaut." But he also wound up settling Medicare fraud claims, the newspaper reported, and left the operation in a financial mess.

Moreover, Kelley found himself answering questions of his own about drug safety issues.

"The research that Kelley has most ardently championed at Penn landed the university in trouble with the U.S. government after a patient in a program to test the safety of a novel gene drug died there last year,"


reported after Kelley left in early 2000. "The U.S. Food and Drug Administration issued a stinging critique last month of the research program."

Sounding Board

Thomas Ajamie, a veteran securities attorney based in Houston, believes the board -- with its decorated medical experts -- could be held accountable for failing to at least question Vioxx's safety. Still, he suspects that Merck directors will escape financial exposure in the end.

Ajamie views the recent WorldCom settlement, requiring 10 of the company's directors to pony up $18 million of their own money, as an exception instead of the beginning of a new trend. He says that directors who can show they exercised some business judgment -- even if it's bad -- tend to be protected.

"I regret saying that," Ajamie said. "I think directors should be held to a much higher standard than they are."

Still, two Merck directors -- William Harrison and Lawrence Bossidy -- cannot distance themselves from the WorldCom development altogether. As part of the recent deal, the

New York Times

reported, the WorldCom directors have agreed to cooperate against other defendants that include J.P. Morgan Chase. Harrison is CEO of the large banking firm. Bossidy sits on its board.

At the very least, some now hope that Merck's busy directors will feel pressured enough to finally hunt for a new CEO. Nearly 10 years have passed since Gilmartin became the first company outsider to lead the giant drugmaker. Some, frustrated by Merck's lack of progress during that time, clearly want Gilmartin to leave before his scheduled retirement next year.

"We believe that Merck's management has been complacent in the face of major disappointments," wrote Deutsche Bank analyst Barbara Ryan, who has a hold rating on the stock. "But the combined impact of declining earnings over the last four years, a failed pipeline and the recent Vioxx withdrawal may now finally drive the board to move for rapid change. This would require a new CEO."