Merck & Co., Inc.

views updated

Merck & Co., Inc.

1 Merck Drive
P.O. Box 1000
White House Station, New Jersey 08889-0100
U.S.A.
(908) 423-1000
Fax: (908) 594-4459

Public Company
Incorporated: 1927
Employees: 47,100
Sales: $10.5 billion
Stock Exchanges: New York Boston Cincinnati Philadelphia Pacific NASDAQ

SICs: 2834 Pharmaceutical Preparations; 2833 Medicinais and Botanicals; 2879 Agricultural Chemicals, Not Elsewhere Classified; 2836 Biological Products Except Diagnostic; 2860 Industrial Organic Chemicals; 2899 Chemicals and Chemical Preparations, Not Elsewhere Classified; 2869 Industrial Organic Chemicals, Not Elsewhere Classified

Merck & Co., Inc. is the largest pharmaceutical company in the world and one of America’s most admired firms. The company also has interests in specialty chemicals. With manufacturing operations in 24 countries, over half of Merck’s sales are made outside the United States.

Merck’s beginnings can be traced back to Friedrich Jacob Merck’s 1668 purchase of an apothecary in Darmstadt, Germany called “At the Sign of the Angel.” Located next to a castle moat, this store remained in the Merck family for generations.

The pharmacy was transformed by Heinrich Emmanuel Merck into a drug manufactory in 1827. His first products were morphine, codeine, and cocaine. By the time he died in 1855, Merck products were used worldwide. In 1857, Merck sent a representative, Theodore Weicker, to the United States. Weicker (who would go on to own drug powerhouse Bristol-Myers Squibb) was joined by George Merck, the 24-year-old grandson of Heinrich Emmanuel Merck in 1891. In 1899, the younger Merck and Weicker acquired a 150-acre plant site in Rahway, New Jersey, and started production in 1903.

The manufacturing of drugs and chemicals at this site began in 1903. This same location housed the corporate headquarters of Merck and Company and four of its divisions, as well as research laboratories and chemical production facilities, into the 1990s. Once known as “Merck Woods,” the land surrounding the original plant was used to hunt wild game and corral domestic animals. In fact, George Merck kept a flock of 15 to 20 sheep on the grounds to test the effectiveness of an animal disinfectant. The sheep became a permanent part of the Rahway landscape.

The year 1899 also marked the first year the Merck Manual of Diagnosis and Therapy was published. In 1983, the manual entered its fourteenth edition. A New York Times review rated it “the most widely used medical text in the world.”

During World War I, George Merck, fearing anti-German sentiment, turned over a sizable portion of Merck stock to the Alien Property Custodian of the United States. This portion represented the company interest held by Merck’s German cousins. At the end of the war, Merck was rewarded for his patriotic leadership; the Alien Property Custodian sold Merck shares, worth $3 million, to the public. George Merck retained control of the corporation, and, by 1919 the company was once again entirely public-owned.

By 1926, the year George Merck died, his son George W. Merck had been acting president for over a year. Over the next 25 years, the younger Merck initiated and directed the Merck legacy for pioneering research and development. In 1933, he established a large laboratory and recruited prominent chemists and biologists to produce new pharmaceutical products. Their efforts had far-reaching effects. En route to researching cures for pernicious anemia, Merck scientists discovered vitamin B12. Its sales, both as a therapeutic drug and as a constituent of animal feed were massive.

The 1940s continued to be a decade of discoveries in drug research, especially in the field of steroid chemistry. In the early 1940s, a Merck chemist synthesized cortisone from ox bile, which led to the discovery of cortisone’s anti-inflammation properties. In 1943, streptomycin, a revolutionary antibiotic used for tuberculosis and other infections, was isolated by a Merck scientist.

Despite the pioneering efforts and research success under George W. Merck’s leadership, the company struggled during the postwar years. There were no promising new drugs to speak of, and there was intense competition from foreign companies underselling Merck products, as well as from former domestic consumers beginning to manufacture their own drugs. Merck found itself in a precarious financial position.

A solution was found in 1953 when Merck merged with Sharp & Dohme, Incorporated, a drug company with a similar history and reputation. Sharp and Dohme began as an apothecary shop in 1845 in Baltimore, Maryland. Its success in the research and development of such important products as sulfa drugs, vaccines, and blood plasma products matched the successes of Merck. However, the merger was more than the combination of two industry leaders. It provided Merck with a new distribution network and marketing facilities to secure major customers.

For the first time, Merck could market and sell drugs under its own name.

At the time of George W. Merck’s death in 1957, company sales had surpassed $100 million annually. Although Albert W. Merck, a direct descendant of Friedrich Jacob Merck, continued to sit on the board of directors into the 1980s, the office of chief executive was never again held by a Merck family member.

In 1976, John J. Honran succeeded the eleven-year reign of Henry W. Gadsen. Honran wasa quiet, unassuming man who had entered Merck as a legal counselor and then became the corporate director of public relations. But Honran’s unobtrusive manner belied an aggressive management style. With pragmatic determination Honran not only continued the Merck tradition for innovation in drug research, but also improved a poor performance record on new product introduction to the market.

This problem was most apparent in the marketing of Aldomet, an antihypertensive agent. Once the research was completed, Merck planned to exploit the discovery by introducing animproved beta-blocker called Blocadren. Yet Merck was beaten to the market by its competitors. Furthermore, because the 17-year patent protection on a new drug discovery was about to expire, Aldomet was threatened by generic manufacturers. This failure to beat its competitors to the market is said to have cost the company $200 million in future sales. A similar sequence of events occurred with Indocin and Clinoril, two anti-inflammation drugs for arthritis.

Under Honran’s regime, the company introduced a hepatitis vaccine, a treatment for glaucoma called Timoptic, and Ivomac, an antiparasitic for animals. And while Honran remained strongly committed to financing a highly productive research organization, Merck began making improvements on research already performed by competitors. In 1979, for example, Merck began to market Enalapril, a high-blood pressure inhibitor, similar to the drug Capoten, which was manufactured by Squibb. Sales for Enalapril reached $550 million in 1986. Honran also embarked on a more aggressive program for licensing foreign products. Merck purchased rights to sell products from Astra, a Swedish company, and Shionogi of Japan.

Honran’s strategy proved very effective. Between 1981 and 1985, the company experienced a nine percent annual growth rate, and in 1985 the Wall Street Transcript awarded Honran the gold award for excellence in the ethical drug industry. He was commended for the company’s advanced marketing techniques and its increased production. At the time of the award, projections indicated a company growth rate for the next five years of double the present rate.

In 1984, Honran claimed Merck had become the largest U.S. based manufacturer of drugs in the three largest markets—the United States, Japan, and Europe. He attributed this success to three factors: a productive research organization; manufacturing capability which allowed for cost efficient, high-quality production; and an excellent marketing organization. The following year, Honran resigned as chief executive officer. In 1986, his successor, P.R. Vagelos, was also awarded the ethical drug industry’s gold award.

Although Merck’s public image was generally good, it had its share of controversy. In 1974, a $35 million lawsuit was filed against Merck and 28 other drug manufacturers and distributors of diethylstilbestrol (DES). This drug, prescribed to pregnant women in the late 1940s and up until the early 1960s, ostensibly prevented miscarriages. The 16 original plaintiffs claimed that they developed vaginal cancer and other related difficulties because their mothers had taken the drug. Furthermore, the suit charged that DES was derived from Stilbene, a known carcinogen, and that no reasonable basis existed for claiming the drugs were effective in preventing miscarriages. (A year before the suit, the Federal Drug Administration banned the use of DES hormones as growth stimulants for cattle because tests revealed cancer-causing residues of the substance in some of the animals’ livers. The FDA, however, did not conduct public hearings on this issue; consequently, a federal court overturned the ban.)

Under the plaintiffs’ directive, the court asked the defendants to notify other possible victims and to establish early detection and treatment centers. More than 350 plaintiffs subsequently sought damages totalling some $350 billion.

Merck was not only beleaguered by the DES lawsuit. In 1975, the company’s name was added to a growing list of U.S. companies involved in illegal payments abroad. The payoffs, issued to increase sales in certain African and Middle Eastern countries, came to the attention of Merck executives through the investigation of the Securities and Exchange Commission. While sales amounted to $40.4 million for that year in those areas of the foreign market, the report uncovered a total of $140,000 in bribes. Once the SEC revealed its report, Merck initiated an internal investigation and took immediate steps to prevent future illegal payments.

More recently, Merck found itself beset with new difficulties. In its attempt to win hegemony in Japan, the second largest pharmaceutical market in the world, Merck purchased more than 50 percent of the Banyu Pharmaceutical Company of Tokyo. Partners since 1954 under a joint business venture called Nippon Merck-Banyu (NMB), the companies used Japanese detail men (or pharmaceutical sales representatives) to promote Merck products.

However, when NMB proved inefficient, Merck bought out its partner for $315.5 million—more than 30 times Banyu’s annual earnings. The acquisition was made in 1982, and Merck was still in the process of bringing Banyu into line with its more aggressive and imaginative management style in the early 1990s.

Problems in labor relations surfaced during the spring of 1985 when Merck locked out 730 union employees at the Rahway plant after failing to agree to a new contract. For three months prior to the expiration of three union contracts, involving 4,000 employees, both sides negotiated a new settlement. However, when talks stalled, the company responded by locking out employees. The unresolved issues involved both wages and benefits.

By June 5th, all 4,000 employees participated in a strike involving the Rahway plant and six other facilities across the nation. In West Point, Virginia, operations were halted when union picketers prevented non-striking employees from entering the plant. Merck, however, was able to win a court-ordered injunction limiting picketing.

The strike proved to be the longest in Merck’s history; but after 15 weeks an agreement was finally reached. A company request for the adoption of a two-tier wage system which would permanently pay new employees lower wages was rejected, as was a union demand for wage increases and cost-of-living adjustments during the first year. Nevertheless, Merck’s reputation as an exceptional, high-paying work place remained intact, and its subsequent contract agreements were amicable. In fact, Merck was ranked as one of the “100 Best Companies to Work for in America” and one of Working Mother magazine’s “100 Best Companies for Working Mothers” since that ranking’s 1986 inception.

During the late 1980s, double-digit annual sales increases catapulted Merck to undisputed leadership of the pharmaceutical industry. CEO Vagelos’ research direction in the 1960s and 1970s laid the foundation for Merck’s drug “bonanza” of the 1980s. Vasotec, a treatment for congestive heart failure, was introduced in 1985 and became Merck’s first billion-dollar-a-year drug by 1988. Mevacor, a cholesterol-lowering drug, and ivermectin, the world’s top-selling animal health product, also contributed to the company’s impressive growth. In the late 1980s, Merck was investing hundreds of millions of dollars in research and development—ten percent of the entire industry’s total. Over the course of the decade, Merck’s sales more than doubled, its profits tripled, and the company became the world’s top ranked drug company as well as one of Business Week’s ten most valuable companies.

The company was also recognized for its heritage of social responsibility. In the 1980s, Merck made its drug for “river blindness”—a parasitic infection prevalent in tropical areas and affecting 18 million people—available at no charge. In 1987, the company shared its findings regarding the treatment of human immunodeficiency virus (HIV) with competitors. These efforts reflected George W. Merck’s assertion that: “Medicine is for the patients. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.”

Growth did slow in the early 1990s, however, as Merck’s drug pipeline dried up. Although the company maintained the broadest product line in the industry, its stable of new drugs was conspicuously absent of the “blockbusters” that had characterized the previous decade.

In July 1993, Vagelos announced Merck’s intention to acquire Medco Containment Services Inc. for $3.6 billion in cash, $2.4 billion in borrowings, and 112 new shares of stock. Medco was a mail-order distributor of drugs that was previously acquired by Martin Wygod in the early 1980s for $36 million. With the help of infamous investment banker Michael Milken, Wygod built Medco into a mass drug distribution system with $2.5 billion in revenues and $138 million in profits by 1992.

The wisdom of the purchase was debated among analysts. On one hand, it was regarded as making Merck more competitive in an American health care industry dominated by cost-cutting managed care networks and health maintenance organizations. On the other hand, some observers noted that Merck’s newest subsidiary would necessarily distribute competitors’ drugs and that it had been a major proponent of discounting, which threatened to cut into Merck’s R&D funds.

The Medco acquisition also complicated Vagelos’ plans for a successor. Vagelos’ choice, Richard J. Markham, resigned unexpectedly in mid-1994, just months before the CEO’s anticipated retirement. Some observers speculated that 54-year-old Wygod, with his cost-cutting tendencies and marketing forte, was a likely successor in the health-care industry of the 1990s.

Principal Subsidiaries

Chibret A/S; International Indemnity Limited (Bermuda); Kelco Specialty Colloids, Limited (Canada); Laboratories Prosalud S.A. (Peru); Medco Containment Services, Inc.; Merck and Company, Incorporated; Merck Capital Resources, Inc.; Merck Foreign Sales Corporation (Guam); Merck Foreign Sales Corporation Ltd.(Bermuda); Merck Holdings, Inc.; Merck Investment Co., Inc.; Merck Sharp & Dohme Inc. (Europe); Merck Sharp & Dhome Industria Quimica e Veterinaria Limitada (Brazil); Merck Sharp & Dohme, Limitada (Portugal); Merck Sharp & Dohme Limited (New Zealand); Merck Sharp & Dohme Overseas Finance N.V. (Netherland Antilles); Merck Sharp & Dohme S.A. (Panama); Merck Sharp & Dohme Scientific and Management Corp., Inc.; Merck Sharp & Dohme Limited (Zimbabe) (Private); MSD AGVET AG (Switzerland); MSD Co. (Japan).