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Merck Finally Gets Its Man


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MERCK FINALLY GETS ITS MAN

Raymond V. Gilmartin still seems dazzled by it all. Scarcely three months ago, he was running Becton Dickinson & Co., a modest-sized manufacturer of medical equipment, when Spencer Stuart headhunter Tom Neff called with word of a chief executive's post opening up. "I said no, I was happy with what I was doing," Gilmartin recalls. And even after 18 years, he felt needed. Then, Neff whispered a single word: "Merck." Very quickly, Gilmartin decided that perhaps Becton could get by without him. After all, he says with characteristic humility, "Any one of us can be replaced."

On June 9, the corporate Cinderella story came to be. Ray Gilmartin, the 53-year-old son of a construction foreman, was anointed successor to Dr. P. Roy Vagelos as CEO and president of Merck & Co., the world's preeminent--if troubled--pharmaceutical company. Assuming all goes well, he will become chairman when Vagelos retires in November--the first outsider to take the top job in Merck's 103-year history.

The succession process was a torturous one. It took 18 months, and Merck lost three top executives along the way. In January, a group of tough-minded outside directors, recognizing that Merck's ills demanded new vision and drastic remedies, took control of the search. "Change has got to be a part of what's going on," says H. Brewster Atwater Jr., CEO of General Mills Inc. and chairman of Merck's search committee. Indeed, the board ultimately bypassed the "dream team" of talented senior managers assembled by Vagelos in favor of a relative unknown.

The question now: Did Merck pick the right guy? This is a company that in two tumultuous years seems to have lost the touch that made it one of the favored growth stocks of the 1980s. Amid turmoil in the health-care world, margins have suffered and profit growth has drooped to about 12% a year. And the new-product cupboard is nearly bare. Merck, in short, needs rescuing.

RISKY CHOICE. Gilmartin certainly has a fine record. He wrestled with pricing pressure and industry restructuring a decade ago and turned struggling Becton into a soundly profitable company. Many rivals and former associates agree he is well suited to guide Merck and its recent $6.6 billion acquisition, distributor Medco Containment Services Inc., into the world of managed care. "I've already been through the kind of changes that are now starting to affect the pharmaceutical companies," Gilmartin says.

In many ways, though, Gilmartin is a bold and risky choice. An electrical engineer with a Harvard MBA, he has no drug industry experience. At $2.5 billion a year in sales, his commodity-oriented Becton is a far cry from historically innovative Merck, which this year will likely top $15 billion in sales.

Without scientific credentials, moreover, Gilmartin won't readily step into Vagelos' role as the industry's eminence grise. The often aloof Vagelos has become the de facto industry spokesman to the Clinton Administration. Gilmartin once headed a trade association for instrument makers--and earlier this year politely disagreed with Hillary Rodham Clinton in a panel discussion. But he is described most often as a genial consensus-builder. "He's a rather pleasant individual and not an aggressive me-me-me type," says drug analyst Neil B. Sweig of Ladenburg, Thalmann & Co. "He won't be giving all that many speeches all over the world."

Most glaring, though, is Gilmartin's utter inexperience with pharmaceutical development--the single most important key to Merck's success over the next decade. The complex business of producing a new drug, with its cutting-edge science and dozen-year lead times, is leagues away from turning out new catheters, pregnancy tests, or even glitzy computer-guided cell sorters. One telling sign: Becton last year spent less than $140 million on research and development, a fraction of the $1.2 billion Merck spent in its global lab network.

DRIVING FORCE. Gilmartin admits he has little understanding of this side of the business and isn't aware of shortcomings in Merck's research pipeline. "I really don't have any sense of that, other than [that] there's probably more potential than is apparent." But then, scientific brilliance isn't what brought Gilmartin to Merck's attention. Rather, it was tectonic shifts in the marketplace: Where drugmakers could once set and raise their prices at will, they now must face managed-care buyers who play companies against one another to drive down prices.

In fact, the need for expertise in the managed-care world has been the primary driving force in Merck's succession battle. Vagelos signaled that in late 1992, when he named a brash 42-year-old marketer, Richard J. Markham, as his president and heir apparent. Seven months later, Markham quit for still-undisclosed "personal" reasons, eventually joining rival drugmaker Marion Merrell Dow as its president and No.2 executive. This year, Medco chief Martin J. Wygod looked to be the likely choice for CEO. But he quit the race in March, about the time Atwater and his colleagues were leaning toward Gilmartin. "Marty's a highly successful entrepreneur, and obviously Merck is a large company," says Atwater. "Merck is a different challenge."

WANT LIST. By that time, indeed, Merck's directors had taken charge. Led by Atwater, AlliedSignal Inc. CEO Lawrence A. Bossidy and former Princeton University President William G. Bowen, the strong-willed outsiders carefully limited Vagelos' role in the search. No surprise: In his new book, Inside the Boardroom, Bowen argues, "While retiring CEOs should provide advice and counsel, responsibility for choosing a new CEO rests squarely with the outside directors..."

Following that script, Atwater and other committee members met with the CEO in January to hammer out a list of the qualities they sought in a successor, then hired headhunter Neff. Ironically, Neff had raided Merck's senior ranks shortly before to recruit another Merck CEO contender, Executive Vice-President John L. Zabriskie, to run rival Upjohn Co. For the Merck post, Neff cast his net wide, contacting likely candidates from a dozen-name list only after they'd been checked out for obvious foibles.

Then the directors met secretly with candidates. They sometimes gathered in discreet second-floor meeting areas at New York hotels--a private dining room at the Carlyle was a favorite. In their offices, security was so tight that fax messages were never sent unless trusted secretaries or the directors themselves stood by the machines. In late March or so, Gilmartin met with Atwater and Bowen at Spencer Stuart's New York office. "It was obvious they liked him from the start," Neff recalls. "He was very articulate and did a terrific job of handling himself."

Soon the directors decided that Gilmartin's standing as an outsider--to Merck and to the drug industry--was a plus. They were struck by his record at Becton of team-building and leading by consensus, qualities he might need to calm the roiled waters at Merck. "Gilmartin knows the external forces that are driving the industry, but because he's not from a competitor, he'll be much better accepted at Merck," says recently retired director Dr. Richard S. Ross, who aided in the search. "This guy is a fresh thinker on the whole business."

Almost all the loose ends were tied up by May 12, when Gilmartin met with Vagelos. The men talked comfortably about their companies and the health-care world in a cordial three-hour dinner at Rudolfo's, a restaurant not far from Merck's headquarters in Whitehouse Station, N.J. "We certainly connected with one another quite easily," says Gilmartin. Vagelos declined to be interviewed.

Gilmartin is known for his deft touch with people. Ralph S. Larsen, the CEO at Johnson & Johnson who worked with Gilmartin at Becton from 1981-83, says: "He is one of the brightest, most effective, and decent executives I know." Last year, he and his wife attended the wedding of a Becton driver, staying through the reception. Says Becton Vice-Chairman John W. Galiardo: "He never caught the CEO disease."

Gilmartin also proved himself as a strategic thinker and a cost-cutter. He opened international markets, sharply boosting overseas sales to 44% of revenues last year. He also drove Becton into higher-margin proprietary diagnostic products, such as instruments for detecting cancer and AIDS. Overall, Becton's sales have risen 44% since 1988, to $2.5 billion; in the face of stiff pricing pressure, gross profit margins have slid only two percentage points, to 44.5%.

But engineering change at Merck will almost certainly be tougher. Its profit growth has slowed sharply since the late 1980s, and under managed-care

Merck may never again see the 30%-plus annual gains that entranced investors. Analyst Mariola B. Haggar of Salomon Brothers Inc. figures earnings this year may rise 11.5% to about $3 billion, and then add another 12.7% in 1995. After that, the picture becomes murkier, as two drugs accounting for $3 billion in sales come under pressure with no apparent successors.

One wild card: Whether newly purchased Medco will substantially boost market share for Merck's products. Gilmartin will have a big hand in making the acquisition pay off. Besides adapting the company to the new health-care environment, though, Gilmartin's mandate includes a hard look at R&D. "I think [he's] got to examine costs and examine the research program," says Ross. "I want him to become familiar with it and get on top of it."

DRUG WITHDRAWAL. After a stellar record of drug introductions in the 1980s, Merck for at least five years has been struggling with a dearth of big new products. Merck labs churned out five drugs in the 1980s that each top $500 million in sales annually. So far, only one of the six new drugs introduced in the 1990s has reached this threshold. And the company's last major new product, the prostate-shrinking drug Proscar, hasn't been as effective as

Merck had hoped: It will fall far short of Vagelos' $1 billion sales goal. Moreover, Merck recently had to drop a licensed schizophrenia medicine, Roxiam, from U.S. testing after at least one European user died. And the company is three years or more away from debuting its likely next big remedy, the osteoporosis treatment Fosamax.

Gaps between big new drug introductions wouldn't be such a great worry if it weren't for the radically shortened life cycles medicines now face. For about one-third of its drug sales, Merck is perilously relying on the cholesterol-reducer Mevacor, introduced in 1987, and the cardiovascular medicine Vasotec, which debuted the year before. But $2 billion Vasotec could fade fast when a competing product from Bristol-Myers Squibb goes off-patent in 1995 and cheap generics emerge. And Mevacor already faces low-priced competition. To bolster sales, in mid-June Merck cut prices on some dosages of Mevacor and a similar drug, Zocor, by up to nearly one-third.

While continuing to cut costs, Gilmartin will face several major challenges. For one, he must foster an atmosphere in the labs that gives researchers the freedom they need for discovery while also making sure that they produce. "You must give people the opportunity in the laboratory to use their own judgment and instincts, and the serendipity will then come," says Cecil B. Pickett, a former Merck star who quit the big company to become executive vice-president of research at the smaller Schering-Plough Corp.

EXECUTIVE EXODUS. An equally difficult task: expanding overseas. Offshore sales accounted for about 45% of Merck's total sales last year, making it one of the most global drugmakers already. Now, if Medco can move its distribution clout abroad, Merck could pick up still more volume. Already, Medco is competing fiercely for European business.

Gilmartin acknowledges that Merck also faces the threat of a management drain. With Markham, Zabriskie, and Wygod already gone, Merck now faces the risk that crucial top managers passed over in the long CEO search could be wooed away. Among them: Executive Vice-President Jerry T. Jackson, CFO Judy C. Lewent, and research chief Edward M. Scolnick.

Gilmartin appears to be striking the right tone, however. He's glad he won't officially take over as chairman until fall. "Learning as much as I can between now and Nov. 1 is crucial, because I'm coming in from the outside," he says. "So there's a lot I have to know." That's welcome candor and humility from a Merck executive. But it's also a jarring reminder of the company's big gamble--that the learning curve won't prove too steep for its new chief.Joseph Weber in Whitehouse Station, N.J., with John Byrne in New York, Mike McNamee in Washington, and Gary McWilliams in Boston


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