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Informations' Effect on Stock Price

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On the basis of interim results from a clinical trial, Merck pulled Vioxx off the market. The results indicated 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. Merck and its investors braced for the inevitable lawsuits from those who believe they were harmed by the drug. Beyond the legal liabilities, Merck also faced challenges from expiring patents on successful drugs and the risky business of developing and marketing new drugs. (Key words: Efficient Capital Markets, Risk and Return)

1. Why did Merck's price fall so significantly? Try to incorporate concepts from session 4 and current session

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 had an obligation to maximize the value of these shares?

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Solution Summary

This solution discusses the price fall of Merck and the related information surrounding the Merck case. A comprehensive discussion for each question is presented.

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1. Why did Merck's price fall so significantly?

Merck's price fell from $45 to $33 as soon as Merck released information pertaining to the recall. Merck took the drug off the shelves and recalled as much of the prescription drug as they could. Merck was trying to avoid any additional harm that could be caused to their consumers that used the drug. As soon as the news hit the market, their stock price began to drop. This is typically a 'knee-jerk' reaction from investors. Recalls and discontinuation announcements from companies, especially when we're dealing ...

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