Thursday, May 05, 2005

Merck's muddle

This morning’s announcement that Merck Chairman and CEO Ray Gilmartin – whose CEO contract was to expire in March 2006 -- is being replaced by Richard Clark, the head of Merck’s factory division, information systems and procurement operations, terminates Gilmartin’s disastrous CEO sentence with an odd punctuation mark.

Gilmartin, the first Merck outsider to become CEO in its 100 year history, came from medical device maker Becton Dickinson in 1994. He was preceded by Roy Vagelos, under whose tenure Merck earned a reputation as a leader with drugs for high cholesterol, hypertension, asthma and osteoporosis. Gilmartin made his mark, as I noted in The Technology Leaders (Jossey-Bass, 1997), by acquiring for $6.6 billion Medco Containment Services, a Pharmacy Benefit Manager (PBM) which manages pharmacy-benefit programs for businesses and health insurance companies.

Gilmartin’s misguided idea was that since PBMs were buying so many drugs Merck could better control the distribution of its wares if Merck owned the biggest PBM. Medco sales exploded from $4.1 billion in 1994 to $26 billion in 2001. But Medco’s low-margin business dragged down Merck’s overall net profit margin. In 2001, Medco accounted for 55% of Merck's revenue but only about 13% of profits.

Merck had other problems with Medco -- including charges of suspicious accounting – when it emerged that Merck had counted $12.4 billion of patients’ co-payments to druggists as revenue generated by Medco although Medco did not actually receive those co-payments. Merck disgorged the Medco mistake in August 2003 through a delayed spinoff.


Gilmartin will no doubt be remembered for the ongoing Vioxx scandal. Merck pulled Vioxx from the market in September 2004 after a study found it doubled patients’ risk of heart attack and strokes. Vioxx may have caused as many as 140,000 heart attacks in the U.S. between its 1999 introduction and the recall. Not only did Merck lose its second best-selling drug, whose sales totaled $2.5 billion in 2003 but it triggered over 2,400 lawsuits and analysts estimate Merck’s liability could reach $18 billion. To make matters worse, Merck’s top selling drug, cholesterol-lowering agent Zocor, loses patent protection in 2006.

But the most bizarre outcome of today’s announcement is the selection of a manager of manufacturing, IT, and procurement to head Merck which during Vagelos’s tenure was known for its invention of life saving drugs. It is hard to see how a manager lacking experience in drug development can help revive the critical pipeline of new drugs that contributed to the success of this once great company.

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