Explain your understanding regarding the case presented and its relevance in the study of behavioral finance.

Behavioral Pitfalls: Judy Lewent and Merck Judy Lewent joined Merck in 1980, and became its CFO At the same time, there were dark financial clouds on the hori- 10 years later. In doing so she became the first woman in the zon. Pharmaceutical products typically receive patent protec United States to serve as CFO of a major corporation. And tion for a period of 17 years. By the end of 2001, all five of the Merck was undeniably a major corporation. During the 1980s major drugs mentioned were due to go off patent. and 1990s, it was recognized as America's Most Admired The pharmaceutical industry is also regulated. In the Company in Fortune magazine's annual survey, winning that United States, the Food and Drug Administration (FDA) must honor seven times, more frequently than any other firm approve all new drugs as being safe and effective. To estab In 1972, Lewent completed her Master of Science in lish safety and efficacy, pharmaceutical firms collect data for business at the Sloan School, Massachusetts Institute submission to the FDA, using clinical trials to test new drugs of Technology (MIT), studying under some of the major in small samples involving both animals and people. academics in finance: Fischer Black, Myron Scholes, and In May 1999, the FDA approved Vioxx to treat pain. How- Stewart Myers. Before joining Merck, she worked as an ever, it asked Merck to conduct a new large postapproval analyst at several financial institutions and in 1976 moved trial in order to extend its study of the side effect profile of to pharmaceutical firm Pfizer. Vioxx in respect to stomach ulcers. The issue was impor- n 1994 Lewent was one of the most respected CFOs in tant, in that existing painkillers that were already on the the United States. That year the Harvard Business Review market, such as aspirin and naproxen (for example, Aleve), published an interview with her, which they entitled "Scientific caused stomach irritation. Merck's earlier studies showed Management at Merck: An Interview with CFO Judy Lewent." that Vioxx did not irritate people's stomachs. However, in 2004, CFO magazine ran an article entitled "What Because aspirin reduces blood clotting, it reduces the in- Will Judy Do?" asking whether she would be able to keep her cidence of heart attacks and strokes. Vioxx does not, a fact job. What happened? of which Merck's scientists and executives were well aware. The short answer to the last question is that in September Surprisingly, Merck's postapproval study appeared to 2004 Merck recalled its blockbuster drug Vioxx, a drug that show that Vioxx actually caused heart attacks and strokes. had contributed 8.7 percent of the firm's global revenues that However, the firm's executives resisted that interpretation and year. The long answer is more complicated and requires a invested heavily in promoting the drug. Then, in September short history of the firm. 2004 a new separate Merck study of colon polyps also found According to Fortune magazine's annual reputation sur- that Vioxx caused heart attacks and strokes.' Merck's manag- vey, Merck was one of America's most admired companies. ers belatedly recalled the drug and prepared for the lawsuits In fact, for the seven straight years between 1986 and 1992, to come. Between September 27 and November 5, its stock Merck ranked as America's most admired company. Merck price fell from $44.46 to $26.21. gained its exalted status by producing a series of block- buster drugs, such as Vasotec for the treatment of blood Sources: A. Mathews and B. Martinez, "E-Mails Suggest Early pressure, Prinivil for cardiac medication, Pepcid and Prilo- Vioxx Worries-As Evidence of Heart Risk Rose, Merck Officials sec for ulcers, and Mevacor to lower cholesterol. Played Hardball; One Internal Message: 'Dodge!" The Wall Street The year 1999 was auspicious for Merck. That year the five Journal, November 2, 2004; "Scientific Management at Merck: An Interview with CFO Judy Lewent," Harvard Business Review, drugs mentioned aimed Merck: $4. 38 billionin U S. sales and ICJan-Feb, 1994; Kate O'Sullivan, "What Will Judy Do?" CFO royalties, at a time when its total net sales were $32.7 billion. Magazine, December 3, 2004