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Prescription for growth eluding Merck

Merck & Co pharmaceutical researchers conduct quality-control tests on products at a company laboratory in Singapore in this undated photo released by Merck. Merck has fallen in just a few years from the world's biggest drugmaker to No. 3 globally and No. 4 in US sales. PHOTO: AP

The problems besetting pharmaceutical giant Merck & Co also plague most of its competitors: falling profits, patent expirations, generic competition, the lack of new blockbuster drugs and pressures to make medicines more affordable.

But the contrast to the heady days and double-digit profit growth of the 1990s is particularly striking at Merck, which has fallen in just a few years from the world's biggest drugmaker to No. 3 as competitors merged and leapfrogged ahead.

"Size is not important in this industry. [Revenue] growth is," Raymond Gilmartin, Merck's chairman and chief executive officer since 1994, said in an interview before Merck's annual update today for analysts on its drug research and development.

Gilmartin, who said he is working on choosing a successor for when he retires in 2006 at age 65, defended the company's longtime strategy of going it alone and steadily increasing research spending, even in lean years.

"The key to success in this industry is novel medicines and medicines that are priced competitively," he said.

But this fall Merck canceled testing of the fourth drug in mid- or late-stage development since February, one of which was expected to be its first entrant in the lucrative anti-depressant market. Merck also announced an unprecedented layoff of 4,400 workers -- 7 percent of its global work force -- as part of a drive to make the company more efficient.

"It's unlikely that we'd see any more cuts of that scale," Gilmartin said.

Meanwhile, net income has been flat or lower for two years, and the company has come up short of analysts' forecasts on earnings per share the last two quarters. Three major drugs, including heartburn medication Pepcid, have lost patent protection in recent years. Merck's stock is trading in the US$43 range, less than half the US$92 peak shares hit at the end of 2000.

Merck, established in New York City in 1891, has been in tighter spots before and bounced back.

Just last week, it pleased analysts with a forecast that its earnings per share will rise about 7 percent next year.

"Companies like Merck don't live year to year or quarter to quarter," said independent pharmaceutical analyst Hemant Shah of HKS & Co of Warren.

He said Merck has had numerous setbacks, particularly in 1983 and 1984, when many products in testing failed to work as expected and a cardiac drug launched with great fanfare was a commercial flop. The company recovered, rolling out blockbusters including Prinivil and Vasotec for high blood pressure, and basically created the cholesterol drug category, Shah said.

"One shouldn't underestimate Merck because at the end of the day, they still have some of the brightest scientists working for them," he said.

Analysts have been warning that Merck doesn't have enough significant new drugs likely to be approved before its US$5 billion-a-year best seller, the cholesterol reducer Zocor, loses patent protection in 2006.

"They are essentially in a situation where the cupboard appears bare," said Mara Goldstein, a pharmaceuticals analyst at CIBC World Markets Corp.
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