ONLY a few years ago, Merck was the Tesco of the pharmaceutical industry — a company that was almost universally admired by its rivals and that kept coming up with innovations to keep it ahead of the pack.

Sir Tom McKillop, the veteran chief executive of Astra Zeneca, the leading British drugs manufacturer, said: "I have great admiration for Merck. It's an extremely ethical business. "It's interesting that for three decades it was the only company that was able to retain a top three position. Companies came and went, including Pfizer, but consistently Merck was up there at the top."

Merck's lofty status has been under pressure for a while, but last week it suffered a body blow. The American giant announced it was withdrawing Vioxx, the arthritis painkiller that was one of its biggest-selling medicines.

The move was prompted by trial data that showed that patients who took Vioxx for more than 18 months were running an increased risk of heart attacks and stroke.

Suggestions that using Vioxx could lead to heart problems have been around for years, but Merck had always insisted that there was no evidence to support this. The loss of the $2.5 billion (Ï1.4 billion) of sales that Vioxx racked up last year is only the start of the company's problems. Within 24 hours of Merck's announcement, two American patients had already filed what are expected to be the first of tens of thousands of product-liability claims.

Jim Hall, president of life sciences at Wood Mackenzie,
a research and consultancy firm, believes Merck is facing claims that will run to "multi-billions, if not tens of billions
of dollars".

The decision to stop marketing Vioxx, a drug taken by an estimated 20m Americans, is the biggest product withdrawal the industry has ever seen
— even bigger than the demise of the "phen-fen" obesity treatment a few years ago. The problems with Vioxx have also increased doubts about the prospects for Arcoxia, a follow-up drug that was one of Merck's big hopes for the future.

Shares in Merck, already depressed by a series of failures and setbacks with new drugs in development, slumped by more than a quarter.

The company is now worth only $75 billion (£42 billion), or less than a third of its peak. Merck is now much smaller than Glaxo Smith Kline, the £70 billion British group with which it contested industry leadership in the early 1990s.
Hall said: "They're fairly vulnerable right now. It raises a basic question about Merck's science, which has been its forte for quite a long time."

Over the past 20 years, the pharmaceutical industry has experienced a steady stream of big mergers and acquisitions — many prompted by impending patent expiries on blockbuster drugs, which inevitably lead to a collapse in sales.

Examples of big mergers include SmithKline Beckman's merger with Beecham; the all-Swiss combination of Ciba and Sandoz to form Novartis; Glaxo's purchase of Wellcome and its subsequent deal with SmithKline Beecham; Astra's merger with Britain's Zeneca; and Pfizer's acquisitions of Warner-Lambert and Pharmacia. Recently a new European giant has emerged in Sanofi-Aventis, the latest incarnation of a business that has swallowed up famous names such as Rhone-Poulenc, Hoechst and Marion Merrell Dow.

In other words, nearly every top-tier drugs company has resorted to major acquisitions to sustain its growth. Almost alone, Merck has placed its faith in the ability of its researchers to keep coming up with important new medicines.

And for many years, under the leadership of Roy Vagelos and — since 1994 — Ray Gilmartin, Merck's laboratories kept on coming up with the goods. However, since the start of the decade, Merck has had to abandon the development of new treatments for diabetes, asthma and depression. Arcoxia has also been delayed by the need for more extensive trials.

Although under pressure, Gilmartin has continued to resist calls for Merck to merge its way out of its difficulties. But after this latest setback, Gilmartin's position and his strategy are again under scrutiny. Some investors and analysts are already calling for Merck to bring in new leadership.

After its recent troubles, there are few obvious internal candidates with the credibility to take over. Many pundits favour the appointment of Fred Hassan, chief executive of Schering-Plough, a mid-sized American drugs company. Schering-Plough is also troubled and analysts believe a merger with Merck could provide a solution to both companies' problems.

Another alternative would be a merger with Novartis, whose strong commitment to science and biotech research might be a good cultural fit with Merck, experts suggest.
Many senior industry figures expect the Merck board will allow Gilmartin to continue as chief executive until his retirement, due in March 2006. Costly though the problems with Vioxx will be, the episode illustrates the inevitable risks of the pharmaceutical business.McKillop said: "The pharmaceutical industry is tough. We keep telling people this is a high-risk sector." Even in its handling of the damaging Vioxx announcement, Merck displayed much of its old quality. The firm took the decision to withdraw the drug itself, rather than having to be forced into it by the US Food & Drugs Administration.

Although it would have been possible to keep selling Vioxx under tighter restrictions, Gilmartin and his colleagues took the view that it was better to withdraw the drug entirely, since there are safer alternatives for patients.

This was in keeping with the company ethos laid out 50 years ago by George Merck, who said: "We never try to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear."

Vioxx patients are unlikely to give Gilmartin much credit for his actions. He must hope investors are more understanding.