Vioxx recall - an example of risk management

A lot of people are horrified and appalled that Merck executives seem absolutely unfazed by the Vioxx recall controversy. From their statements and behavior, it seems it is business-as-usual for them. In fact, it has been business-as-usual for them for years since in the case of Vioxx itself, the firm knew as early as 2000 that Vioxx was killing people, but instead of doing something about it, they embarked on a $500 million direct-to-consumer advertising campaign (by the way that is a lot of money for advertising a drug) asking naive consumers to pop Vioxx and risk their lives so that Merck could continue to mint money (and they did). Merck's sales from Vioxx were approximately $2.5 billion, and even this year, despite all the mess, it will still generate about $6 billion in profits.

The reality, however, is that such behavior by drug companies (and to some extent by other companies that manufacture products or provide services that have the potential to kill, e.g. automobile companies, airlines, etc.) is standard operating procedure. This is how the system typically works:

• Every product/service has a certain level of risk attached to it and drugs are at the high end of the risk profile. So prior to launching a product (and after a product has been launched and more reliable data is available), companies continue to assess the risk profile, including estimation of number of deaths that are likely to occur. It is common to develop multiple scenarios for accidents/deaths/injuries.
• The people who do this type of analysis typically tend to be management consultants, strategy gurus, and risk management experts. Their analysis is cold and based on hard numbers without any emotion whatsoever. In their analysis, a death is only a dollar number that the firm will need to spend to resolve it.
• The analysis typically shows how many deaths will make the drug stop creating value (a complicated way to saying that the liabilities from lasuits will exceed the profits from the sale of drugs). Their recommendation is that at that point the firm should pull the drug off the market, deal with the lawsuits (for which provisions have already been made in the risk analysis), and move on as if nothing has happened. Since the pricing of the product already took into account the potential liabilities from lawsuits, over the life of the drug, it will still be highly profitable. Or in other words, it might very well be that Vioxx could still be a highly profitable drug for Merck over its life.

This is exactly what Merck is doing right now. It is simply following the action plan that was put into place many years ago as part of its Vioxx strategy. So don't expect that Merck's Gilmartin will be on national television apologizing to those who lost their loved ones or say sorry to those who are suffering even more after taking the drug or do anything different. For a drug firm, this was is all expected and planned for.

Recommended article: Vioxx drug liability for Merck