Merck Research
(Fortune)---Rat No. 3 is determined. He
lumbers straight to an
octagon in the corner of the pen and runs his white whiskers over
its edges. In another corner is a white ball. It holds little
interest for
No. 3--exactly the result Merck researcher
for. The rat has a few micrograms of Merck's memory-enhancing
compound coursing through its tiny veins, a prototype medicine
that might someday treat Alzheimer's patients or people who have
suffered a stroke. How does
Rats can only remember what's happened to
them in the past four
hours. No. 3 spends more time investigating the octagon, says
he's bored with it.
The medicine
Park labs just outside
work and clinical trials to go before the company can send it to the
FDA for
approval. The odds that any test compound will make
it to
market are incredibly low. It's a fact
painfully aware of. At 29, and at the beginning of her career with
Merck,
pharmacists' shelves before she retires. Even so, she is excited by
her findings. "It's so novel we can't really talk about it
right now,"
says
memory into that of a 50-year-old."
Unfortunately, Merck investors don't need a
pill to remember
happier times. Back in 2000, the
behemoth's revenue growth was tops in the drug industry.
Between 1994, when
Merck's annual earnings growth averaged
17%; in the 1990s,
Merck's shares rose 600%. But those days
have faded. Following
a raft of patent expirations on some of Merck's biggest drugs,
the
$48-billion-a-year company will have no
earnings growth at all in
2002. Since December 2000, the stock has
fallen 43%, vs. 21% for
the S&P; Merck shares recently traded for $53 each.
What's odd about Merck's predicament is
that its scientists have
been demonstrably more innovative than the competition. Since
1996, Merck researchers have patented 1,933
new compounds,
400 more than
second-place Pharmacia. Certainly not all newly
discovered compounds lead to viable products, but patents are a
prime indicator of research productivity. Even more impressive,
Merck's scientists do more with less. Their
discoveries cost an
average of $6 million per patent, the lowest in the industry.
Competitors like Pfizer,
drug revenues back into R&D, while Merck reinvests just
12%.
Exceptional science is nothing new for
Merck. The company traces
its roots to 1668, the year
Merck was the most powerful drug firm on
the Continent, the first
to commercially produce morphine, codeine, and cocaine, then
considered medicinal. Thirty years later scion
crossed the
N.J., where
the company still maintains a research facility. In the
1930s, Merck led the industry in
synthesizing vitamins like B-1 and
B-12, and in 1949 it worked with Nobel
Prize-winning biochemists
batch of arthritis-reliever cortisone.
That focus on breakthrough medicine is the
main reason Merck
continues to attract the world's leading biochemists and engineers--
people like
confines of academia to join Merck as executive vice president of
neuroscience. "I was having a ball in
came here because Merck enjoys a widespread reputation for
sustained application of the best science," says Choi.
Does he feel
pressure to produce a big drug? Sure he does. "But this is a
singular moment in medical history,'' he says. "Things are
definitely
going to happen."
The question is when. Despite the company's
edge in innovation
and efficiency, Merck hasn't been able to churn out enough new
products to offset shrinking sales from drugs losing patent
protection. The malaise isn't unique to Merck, of course. Beset by
cutthroat competition from generic drugmakers,
pricing constraints
imposed by managed care, threats of government price regulation,
and more intense FDA scrutiny, most brand-name drugmakers
are
struggling. Merck's problems are complicated by its decision last
winter to spin off Medco, the
prescription-benefits-management
firm that provided more than half of Merck's revenues. As a result,
the company's future depends more than ever on blockbuster
drugs--at a time when the entire pharmaceuticals industry is having
difficulty delivering them.
That's been the case for a while now.
During the 1990s only 15%
of the 1,035 major drugs approved by the FDA used new active
ingredients or treated illnesses in original ways. The majority of
approvals were modifications of existing medicines, so-called me-
too drugs. Even without much innovation, the cost of ushering a
new medicine to market has risen 60% since 1990, to more than
$800 million.
In this difficult environment, a drugmaker's pipeline of soon-to-be-
released medicines is critical. Patents give companies exclusive
sales rights for an average of 11 to 12 years, but once that period
expires, generic drugmakers enter the market
and begin selling the
medicine at cut-rate prices. Within a month or two the name-brand
company can lose as much as 80% of its sales to generic
replacements. In order to stanch that revenue drain, name-brand
companies must generate a constant flow of new products. Yet
their pipelines are just about tapped out.
No company illustrates Big Pharma's woes better than Merck. Last
month the patent on its $1.1 billion Prinivil
ran out, ending a spate
of recent expirations that included Mevacor,
Vaseretic, and Pepcid-
-together representing annual sales of
roughly $4.5 billion, or 10%
of Merck's total. Another potential weak spot is Merck's Prilosec, a
heartburn remedy developed in a joint venture with AstraZeneca
PLC. The world's second-bestselling drug, Prilosec
garners $3
billion a year in
FDA has just awarded a generic maker the
right to market a form
of the drug. Merck and AstraZeneca are
fighting to extend the
patent.
When Merck executives talk about promising
new drugs, they point
to Arcoxia, an arthritis pain reliever; Zetia, a cholesterol medicine;
and something the company calls Substance P, a drug to prevent
nausea and vomiting in chemotherapy patients. The company is
loath to mention, though, that it pulled its FDA application for
Arcoxia last spring for additional review, and
that Substance P has
run into snags in clinical testing. The release dates for both have
been pushed back. Even so, Merck claims its pipeline beyond
those drugs is among the strongest ever, with future medicines like
a diabetes drug called KRP297, a human papilloma
virus vaccine,
and an HIV vaccine that is in phase I of clinical testing.
Wall Street isn't convinced. Says
growth? No. Until we see proof, there's going to be
skepticism."
The disbelief sounds awfully familiar to
Merck's old guard.
Scolnick joined the company in 1982 as a research scientist and
achieved a place in the Merck pantheon when he led the team that
developed the cholesterol reducer Mevacor in
the mid-1980s. Now
executive vice president of science and technology, he's seen
Merck endure many feast/famine cycles.
"We went through the