Updated from Sept. 30Disgruntled shareholders and terrified Vioxx patients may be clamoring for the head of Merck ( MRK) Chairman and CEO Raymond Gilmartin, but they should be careful what they wish for. Crisis-management experts warn that axing the beleaguered Gilmartin would be a drastic mistake that makes Merck's problem -- a voluntary recall of the arthritis drug Vioxx, which has been found to increase the risk of stroke and heart attacks in patients who take it -- into something even worse. Firing Gilmartin would create two problems, leaving management scrambling to not only find a way to recover after the Vioxx recall but also an executive who would be willing to step into the crosshairs and lead the way back. "People equate massive, cinematic moves with good crisis management -- but that's wrong," said Eric Dezenhall, head of Dezenhall Resources, a Washington crisis-management firm. "There's a difference between firing someone and managing the crisis. If you want to show consumers that you're taking action, a CEO sacrifice is one way to do that. But don't you want someone in command to weather the storm? Weathering storms is an underrated skill these days." A good case can be made for Gilmartin's immediate ouster. Earnings are slumping, Merck's stock was in a slump before its 27% selloff Thursday and sales of the company's No. 1 drug and blockbuster cholesterol-fighter, Zocor, fell 8% in 2003, a trend that will grow when it comes off patent in 2006. The pipeline to replace a leader like Zocor is weak, with four potential treatments failing clinical trials in the past year. And now, the company faces the Vioxx recall, which is likely to trigger a tsunami of class-action lawsuits while lowering 2004 earnings by 50 to 60 cents a share. Gilmartin says he's staying put. The CEO has stressed that he will not step down from his post until his planned retirement in 2006, saying he has the full backing of the company's board of directors. "Mr. Gilmartin does have the full support of the board and let me also tell you that -- we haven't taken a vote -- but certainly I do not favor shortening his tenure at Merck before his announced retirement," Johnnetta Cole, board member and president of Bennett College, said Friday. "Let me go further and say the kind of integrity expressed by the way Mr. Gilmartin has handled this unfortunate situation with Vioxx warrants more support from me." (Telephone calls to several other board members were not returned.) "That is the mindset of the leader in that situation," said Harvey Nachman, principal of NachmanHaysBrownstein, a crisis-management firm based in Philadelphia. In order to reach that pinnacle, you have to have confidence in yourself throughout your entire tenure. You have to face the heat and gut it out and make an orderly transition."
And Gilmartin has faced the heat. Despite a year of headlines questioning Gilmartin's performance at the helm of the company, even Wall Street brokerages believe his job is safe -- for now. Sena Lund of Cathay Financial, an investment research firm, called the Vioxx recall a "disaster" but ultimately doubts Gilmartin can be easily tossed aside. For starters, he's close to retiring. And picking a new CEO to helm one of the world's largest and best-known drug companies is a time-consuming process -- one that will be only more arduous now that Merck faces a massive scandal on top of the company's many problems. Crisis managers note that investors and media who are looking for drastic action already have seen one. Merck's recall of Vioxx, which had $2.5 billion in sales in 2003 and was widely prescribed, is the kind of move unseen since the 1980s, when a series of cyanide deaths forced Johnson & Johnson ( JNJ) to recall $100 million in Tylenol capsules. The company was lauded for its crisis management and has recovered nicely. As Dezenhall notes, strategic responses "don't get much more radical than this. The vast majority of the times when a company is faced with a decision like this -- they don't pull it." How Merck handles this crisis in the months to come will likely determine and seal Gilmartin's fate. If, like Johnson & Johnson, Gilmartin can protect the company's brand, reassure a nervous public and establish confidence that Merck is in full control, he will be remembered as a hero. Naturally, Gilmartin has already cast the recall in an altruistic light, with the company moving to alert the Food and Drug Administration and issuing a recall for the good of patients -- profits be damned. But the court of public opinion can be brutal -- just ask Arthur Andersen -- and Merck could be doomed if it botches the recall and rubs customers the wrong way. So far, the company has been good at stressing the need to serve patients over profits, but all of the talk about numbers appears a bit insensitive to Jonathan Bernstein, president of Bernstein Crisis Management and author of the Crisis Manager newsletter.
"Other than Johnson & Johnson, medical companies are bad at appearing compassionate," Bernstein said. "Vioxx is very well prescribed and Merck needs to express concern to people who take it. There's been absolutely no message of compassion from the company. That's one of the biggest mistakes you can make." Time will tell -- literally. Expect the lawsuits to closely examine the timeline surrounding the recall and what the company did and did not know. Last Thursday evening, Merck said it officially discovered problems with Vioxx, which had been rumored for years and denied by the company. After reviewing the data, the company alerted the FDA, making the decision to pull the drug on Tuesday. "If this is nothing more than a recall based on additional testing, then Gilmartin survives," Bernstein said. "But if there's a smoking gun, evidence that gets uncovered that demonstrates that Merck and he were more aware of the risk than they revealed ... there's no question he will be gone."