As for the ethics of the doctor's decision, let's keep in mind that fictional universes often do follow different rules from the real one. But we accept those different rules as part of the way the fictional world works -- like the Force in Star Wars
or the emotional spectrum in Green Lantern
or magic in Harry Potter
. We have to judge the characters' actions and decisions in those universes based on their own rules rather than ours, or else we'd have to conclude that Harry Potter was a delusional schizophrenic, or that Buffy the Vampire Slayer was a mass murderer.
the laws of evolution in the Trek universe really do work the way Phlox said, shouldn't we assess the ethics of his decision on those grounds, rather than on the way it works in our universe? If he was right that the natural course of evolution was for the Valakians to die out so the Menk could flourish, then there's no telling what harm could've resulted from artificial intervention to subvert that process.
True, it is a bit hard to reconcile his reluctance to interfere with natural evolution with what was later established about the Denobulans' acceptance of genetic engineering. But we did see, in the Augments arc and "Affliction"/"Divergence," that Phlox had a serious ethical objection to reckless or ill-considered interference with genetics. In "Dear Doctor," he wasn't really saying he thought the Valakians should die, just that he didn't think it would be responsible to tamper with the planet's evolutionary process when they had so little understanding of how it might unfold. After all, with something as slow as evolution, it could take centuries of study and observation to get a really good handle on all the issues involved, so making a decision after just two days of study would've been too reckless. Basically Phlox was saying that they didn't know enough to know what the right decision was, and that they should therefore defer interfering. Which is pretty much the exact mentality behind the Prime Directive.
So given the parameters of the problem as defined within the episode and within the laws of its fictional reality, I don't see how Phlox's or Archer's decision is so horrible. Basically they're just accepting that sometimes the responsible choice is to admit you don't know enough to take action, rather than acting on incomplete information and potentially doing more harm than good.