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Merck: Out Of The Ivory Tower


Merck & Co. executives have always taken great pride in the 115-year-old company's long list of scientific firsts. It includes the first measles vaccine (1963), the first cholesterol-lowering statin (1987), and what is likely to be the first vaccine for cervical cancer, now under Food & Drug Administration review. The message from Merck (MRK) over the years was clear: If it isn't cutting-edge, breakthrough science, it isn't Merck.

That's why analysts and investors were surprised when the drug company disclosed a decidedly un-Merck-like project at a Dec. 15 analyst meeting. The plan was, in essence, to tweak niacin, a well-known vitamin that raises "good" cholesterol, and turn it into a blockbuster. "It's the first time in a long time I've seen [Merck] act practically," says Morgan Stanley (MS) analyst Jami Rubin. Such pragmatism will be critical as CEO Richard T. Clark pushes for more efficiency and focus in everything from drug development to sales and marketing to manufacturing. He's candid about Merck's woes. "We were once the envy of the industry," he said at the meeting. "That's not the case today."

No doubt major change is needed at the once iconic drugmaker. It is facing what some analysts estimate could be a $30 billion liability stemming from lawsuits over the withdrawn Vioxx. That painkiller, of course, was another first -- part of an entirely new class of drugs. Adding to the pressure: Two Merck blockbusters must contend with generic competition in the next few years. The biggest hit comes in June, when its $4.4 billion cholesterol-lowering drug, Zocor, loses patent protection in the U.S.

There are promising products in the pipeline, such as Gardasil, the cervical cancer vaccine, but not enough to offset the generics. So while Clark, who became CEO in May, 2005, has said that a $5 billion cost-cutting effort will help Merck achieve double-digit compound annual growth in earnings per share from 2005 to 2010, Wall Street is skeptical. "The numbers just don't add up," says Trevor M. Polischuk, pharmaceutical analyst at asset managers OrbiMed Advisors LLC.

ALLERGY DISCOVERY

What's clear is that Merck is leaving behind its ivory tower culture. Under former CEO Raymond V. Gilmartin, Merck steered clear of large deals, preferring to get a product or new technology by buying smaller companies. But last month at the World Economic Forum in Davos, Clark said he was looking for more established businesses, particularly in biotech. Merck is also zeroing in on nine key areas of research, such as heart disease and cancer, rather than trying to cover all bases. It will shift 1,500 reps from selling current products to promoting new vaccines.

The niacin project is the most striking example of the new approach. While drugs such as Zocor and Lipitor do a great job of cutting LDL, or bad cholesterol, they only slightly boost HDL, or good cholesterol. Niacin is much more effective at boosting the good stuff and has been shown to help decrease the risk of heart attacks. But the vitamin often triggers uncomfortable flushes. That problem has been mitigated by newer formulations of niacin, but the vitamin hasn't gained widespread use as a way to combat heart disease.

Merck came to the niacin project in a roundabout way. While executives declined interviews about the venture, a spokesman confirms that the drug being developed was first studied as a possible treatment for allergies. Researchers had come up with a compound for blocking a substance in the body that plays a role in allergic responses. That substance was also found to be central to niacin flushes. The company is starting late-stage human trials, studying the compound in one pill with niacin and in another pill with both niacin and its cholesterol-cutting drug Zocor.

FDA HURDLES

Merck is accustomed to leading the pack, but this program is an attempted end run around rivals that are out in front. Pfizer Inc. (PFE) is developing a novel HDL-raising drug called torcetrapib. That drug, along with a competing product in development at Roche Holding Ltd. (RHHVF), raises good cholesterol differently from niacin. Pfizer hopes to file its drug for approval with the FDA in 2007. But while niacin's benefits are known, Pfizer and Roche need to prove their compounds have real cardiac benefits as well. Should the FDA ask for more data, approval could be delayed.

If that happens, and if the niacin combo sails through the FDA, Merck could beat Pfizer to market. But Merck also faces challenges: No other drug exists on the market that blocks the substance targeted by Merck's anti-flushing product, and scientists say much is unknown about the role of that molecule in the body. Sanford C. Bernstein & Co. analyst Richard T. Evans warns that Merck's development program is studying a relatively small number of people, so the FDA may want more data.

Nevertheless, Wall Street is modestly optimistic about Merck's future. A growing sense that Merck can weather the Vioxx storm helped send the stock up 17%, to 35.59, in the past six months. Even if the gussied-up vitamin doesn't take off, it's a sign that Merck can seize a commercial opportunity even when it doesn't have the most dazzling science on the block. "It's sort of like middle age," says SG Cowen & Co. (SCGLY) analyst Stephen M. Scala. "You admit you can't do all the things you used to."

By Amy Barrett


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