Monday May 3, 2:52 pm Eastern Time
Merck CEO hopes to confound skeptics one more time
By Ransdell Pierson
NEW YORK, May 3 (Reuters) - With the world's largest drug company approaching perilous seas, Merck & Co's (MRK - news) low-key boss Raymond Gilmartin hopes once again to overcome fearful skeptics by keeping his ship on course with surging sales.
Gilmartin is girding for the potential loss of billions of dollars in annual revenues in 2000 and 2001, when U.S. patents expire on five key Merck drugs and competing generic versions enter the market. But he vows that growing sales of other, newer Merck drugs, including a painkiller named Vioxx, will offset the loss.
Merck shocked Wall Street in 1994 by choosing Gilmartin -- the 53-year-old chairman of medical supply company Becton, Dickinson & Co (BDX - news) -- as its CEO. He became the first outsider named to the post in Merck's 103-year-old history.
The quiet Gilmartin, known for ability to cut costs and to deal with the competitive managed care environment, succeeded Merck's high-profile boss, Roy Vagelos.
''Gilmartin arrived at a time of disarray, after several Merck executives in the running to replace Vagelos left the company. Other senior managers were unsettled and there was concern this outsider wouldn't be able to hold it together,'' recalled New York drug analyst Viren Mehta.
''But Gilmartin succeeded by reinvigorating the team, delegating authority, and bringing out the best in people,'' Mehta added, producing steadily higher revenues that have led to a tripling of the company's share price in the past five years.
In a Reuters interview, Gilmartin said the company's ''good underlying fundamentals'' would allow Merck to weather the upcoming patent expirations and achieve solid earnings growth without needing to merge with another drug maker.
''If you look over most of the past 10 years, we have been one of the fastest-growing pharmaceutical companies. We can't do it every year, but that's our aspiration,'' Gilmartin said of the company's earnings performance.
Merck in 1997 was among the industry's earnings leaders, with per-share operating growth of about 17 percent. It slipped to 15 percent in 1998 after other companies saw prodigious earnings growth from newer blockbusters while Merck's own slate of five new drugs got off to a slow start.
Merck is expected to continue lagging its peers with operating net per-share growth of 14 percent in 1999, 13 percent or less in 2000, and possibly single-digits by 2001 as patent expirations take their toll.
''The patent expirations are a major wild card for Merck. How Gilmartin handles them will be crucial to the company's future stock performance and to his legacy as Merck's CEO,'' said Hambrecht & Quist analyst Alex Zisson.
In 2000, Merck will lose market exclusivity for ulcer drug Pepcid and hypertension treatment Vasotec. Patents expire in 2001 on anti-cholesterol drug Mevacor, hypertension agent Prinivil, and ulcer drug Prilosec.
Pepcid, Vasotec, Mevacor and Prinivil together had 1998 U.S. sales of $3.2 billion. Merck is believed to have had over $1 billion in U.S. revenues last year from Prilosec, marketed by joint venture partner AstraZeneca .
Altogether, U.S. sales of the five drugs accounted for over 25 percent of Merck's 1998 global pharmaceuticals revenues.
Gilmartin last week said he expected growing sales in 14 Merck medicines launched since 1994, plus the pain and arthritis pill Vioxx now awaiting U.S. marketing approval, to offset declining revenues of the five endangered older drugs.
Wall Street expects Vioxx to be approved by May 23 and to compete feverishly against Monsanto Co's (MTC - news) drug Celebrex. Both work by blocking the COX-2 enzyme linked to inflammation, but with apparently far less risk of deadly ulcers seen in standard current remedies.
Gilmartin said he was not interested in bolstering revenues by co-marketing drugs already developed by other companies. Pfizer Inc (PFE - news), by contrast, has perfected that strategy -- co-marketing Warner-Lambert Co (WLA - news) anti-cholesterol drug Lipitor and Monsanto's Celebrex.
''Merck has a history of internally developing its own drugs or developing early-stage compounds licensed from other drug companies. That's where we see the highest payoff -- not from trying to leverage our sales force,'' Gilmartin told Reuters.
HSBC Securities analyst Jack Lamberton said Gilmartin's expertise in marketing low-margin surgical supplies while running Becton, Dickinson has served him well at Merck -- whose high-volume, low-margin Medco pharmaceuticals benefits management (PBM) unit has become a big moneymaker.
Merck plunked down $6.6 billion the year before Gilmartin's arrival for Medco Containment Services, which is paid to manage retail drug benefits for health-care providers. In 1998, Medco sales reached $11 billion, or 42 percent of Merck's overall company revenues of $26 billion.
In the first quarter of 1999, the Medco unit had revenues of $3.58 billion from handling 94 million prescriptions.
''Gilmartin has proved adept at managing two cultures,'' Lamberton said. ''With Medco, Merck gets a small margin on huge numbers of transactions it manages. Merck's research-driven business of developing and marketing drugs, on the other hand, is a high-margin but lower-volume business.''
By contrast, Lamberton said both Eli Lilly and Co (LLY - news) and SmithKline Beecham Plc (quote from Yahoo! UK & Ireland: SB.L) last year sold off their own PBMs for a major loss after failing to make them profitable.
''People continue to underestimate Medco. Its sales can be leveraged much higher,'' said Sands Brothers analyst David Buck, who predicted growth will come from increased numbers of transactions over Medco's Internet-based service option. |
