Merck in need of fix to get off the sick list
By Geoff Dyer and Adrian Michaels
Published: January 21 2002 20:06 | Last Updated: January 21 2002 20:21
Aspirin marked the foundation of the modern drugs business. Now it is causing a headache for Merck, the industry leader for much of the last two decades.
Facing a string of patent expiries, Merck had been banking on Vioxx, its new painkiller, to get it out of trouble. However, sales have slowed since research last year implied the drug was less effective than aspirin at preventing heart attacks.
Merck's 2001 results will make grim reading. After two profit warnings last year, the New Jersey-based group has already admitted that earnings will stagnate this year. The shares fell 37 per cent in 2001.
The company, which has long defended its independence in an industry that is constantly consolidating, is now being urged to look at acquisitions.
Merck's problems strike to the heart of the debate about how to run a large drugs company. Since 1999, it has been overtaken by two merged groups - Pfizer, which bought Warner Lambert in 2000 for $84bn, and GlaxoSmithKline, the result of last year's tie-up between Glaxo Wellcome and SmithKline Beecham. Both boast huge marketing machines and are only too happy to buy in drugs from rivals.
At Merck the philosophy has always been to hire top scientists and back them to find innovative and lucrative drugs. Ed Scolnick, head of research, has embodied this image. Investors and analysts flock to Merck's annual review to hear the former academic's waspish comments on biomedical research.
With Dr Scolnick nearing retirement, Merck has signalled continuity by hiring a replacement from academia, Peter Kim.
Confident of its ability to innovate in the labs, Merck has always turned up its nose at using big deals to boost earnings.
Senior investment bankers admit that they do not even get access to Raymond Gilmartin, Merck's chairman and chief executive, to pitch ideas.
"We are a research-based company that has a unique capacity to turn cutting-edge science into medical breakthroughs," he said as he announced December's profit warning. "Quick fixes are not what we are looking for."
Merck was in a similar situation two years ago when investors first started to focus on the looming patent expiries. However, Mr Gilmartin was able to allay concerns by squeezing more from its top drugs through increased marketing and the successful launch of Vioxx.
Vioxx is part of a new class of drugs known as Cox-2 inhibitors which are effective at reducing pain, but avoid the ulcers associated with traditional painkillers. Popular with rheumatoid arthritis patients, the Cox-2 market has grown to around $5bn, divided between Vioxx and Pharmacia's Celebrex, which it sells together with the ubiquitous Pfizer.
However, sales growth has fallen since the Journal of the American Medical Association suggested in August that the risk of heart attacks was higher with Cox-2 drugs. The drugs do not cause heart problems but lack the beneficial side-effects of aspirin, which reduces blood clotting.
Studies are under way to test the effectiveness of all painkillers when taken with low-dosage aspirin. Fred Hassan, Pharmacia's chief executive, believes the Cox-2 market will grow again once the heart attack questions have been answered. But meanwhile, doctors have become reluctant to recommend the drugs.
So where does Merck go from here? In the long-term, it hopes that the $620m acquisition of Rosetta Inpharmatics, a genomics business, will enhance its drug discovery process. But much is riding on Arcoxia, its second-generation Cox-2, to revive earnings. If it does not relieve the pain, Merck's board, which has occasionally voiced criticism of Mr Gilmartin's go-it-alone approach, could call for more radical action.
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