"Merck used to have such contempt for people who suggested it would buy Schering-Plough," says Michael Krensavage, principal at Krensavage Asset Management. "The about-face is stunning."
The deal pleases financial analysts, who believe it should help the company increase earnings and maintain its dividend.
It could boost sales of cholesterol drugs Zetia and Vytorin, which the two companies jointly sell, trading a fractious relationship for clear lines of authority. Merck
But the Schering deal marks the end of a set of ideas Merck once represented: the primacy of science in the pharmaceutical business, a faith that ingenuity trumps cost-cutting and marketing, and a pride in its own work that was so intense that the suggestion of buying a rival was a tactic of last resort.
Though there were downsides to Merck's old culture, including a bad case of not-invented-here syndrome, it also was an engine that created an amazing amount of medical innovation, including the statin class of cholesterol drugs, part of the pharmacopeia that has cut the rate of death from heart attacks and strokes by 30% since 1998. For a long time, Merck was run by a scientist, the drug researcher Roy Vagelos, and it had a reputation as a moral corporation that gave drugs to developing nations to treat diseases like river blindness.
Change is washing over the entire drug business, however. Genentech's
"Merck has been a symbol of a company that's done well by going it alone," wrote Derek Lowe, a pharmaceutical chemist, on his blog, adding that the deal is "doubly disturbing" because it is as if Merck is "breaking down and giving in."
Growing a company the old-fashioned way--by inventing new medicines--hasn't been working. Invention itself is too unpredictable and difficult. The whole idea of a "drug pipeline" seems almost silly. Eventually, no matter how good a company's scientists are, their luck runs out and a collection of promising compounds fail at once. Marketers, who can deliver a quick fix by temporarily juicing sales, get more control. Mergers allow for cost-cutting and big payouts for executives. And somehow whatever culture was involved in inventing all those drugs just dies off.
Vagelos retired from Merck in 1994 when he reached the mandatory retirement age. He was replaced by Raymond Gilmartin, recruited from health care equipment maker Becton-Dickinson. Merck remained the largest drug company until first
To avoid doing a big deal, Gilmartin bet on Vioxx, a new kind of arthritis pill designed to be easier on the stomach. It hit the market in 1999. Merck shares peaked in late 2000. In 2001, several cardiologists at the Cleveland Clinic published an analysis arguing that Vioxx and to a lesser extent its rival drug Celebrex, from Pfizer, might cause heart attacks. Merck denied any link. The company argued that naproxen, which Vioxx was compared to in clinical trials, actually had a previously undiscovered ability to prevent heart attacks.
In 2003, four of the company's experimental medicines were scrapped, leaving its pipeline empty. Trying to quiet growing investor restlessness, the company for the first time made more details about its experimental drugs available.
Vioxx was yanked from the market in September 2004 because it did indeed cause heart attacks. Some analysts thought Merck would buy Schering then. Gilmartin, the chief executive at the time, was adamant that the lost sales and potential legal liabilities did not mean he should do a big merger.
"We continue to have the belief that [a] large-scale merger does not meet our definition of creating shareholder value, which would be in contributing to our pipeline or through our long-term growth," Gilmartin said at the time.
But the Vioxx crisis metastasized. Plaintiff lawyers swarmed, and analysts predicted liabilities that would spiral into the tens of billions of dollars. Merck still clung to its hypothesis that naproxen offered protection against heart attacks and argued that Vioxx's bad effects started after 18 months of use--an assertion that would reduce the number of patients that could sue the company. The editors of the New England Journal of Medicine eventually scolded Merck for not including evidence of Vioxx's risk in one article and corrected another to weaken the 18-month claim.
In May 2005, Gilmartin was replaced as chief executive by Richard Clark, Merck's current boss. Clark was likewise adamant that a big acquisition was not an option. "Certainly our view of large mergers hasn't changed," Clark said during his first conference call with investors in May 2005. "I think it's been validated in the marketplace."
At first, Clark's tenure seemed like a new dawn. Shares surged 35% in 2007 as Merck launched six new products, including the blockbuster diabetes pill Januvia and Gardasil, a vaccine for the virus that causes cervical cancer. In 2007 Merck settled the bulk of Vioxx claims for just $4.85 billion. Shares hit a five-year high in January 2008.
But trouble resurfaced that very month with the cholesterol drugs Zetia and Vytorin, which Merck sells with Schering-Plough. The analysis of a key study of the medicines, mostly handled by Schering, had been delayed for a year. That left an opening for critics to question the effectiveness of the medicines, which wound up reducing their use by 40% from a peak in November 2007.
The controversy also laid bare the contentious relationship between the two companies, including one e-mail uncovered by Congressional investigators in which Schering-Plough's chief of cardiovascular research referred to a Merck executive as a "prick" in an exchange with another colleague.
Problems began to pile up: Merck was unable to manufacture vaccines, including Zostavax for shingles, in sufficient quantities despite significant demand. The Food and Drug Administration told the company that it shouldn't expect to win approval for a new heart drug called Cordaptive for five years. (See "Merck Faces Another Tough Year.")
Merck's share price dropped by 50% between January and November 2008. In December, Clark approached Schering-Plough.
It wasn't the path foreseen for Clark when he joined the company three and a half years earlier. During Clark's first conference call with analysts, board member--and former
At least one analyst worried that there was hint of the future in that historical reference: "I was surprised in the opening remarks you cited the acquisition of Sharp & Dohme by Merck 50 years ago," said Steve Scala, a pharmaceuticals analyst at S.G. Cowen, when the call was opened for questions. "My understanding is that it was a very tough integration with very different cultures. ... Why did you cite what I believe was a painful event in Merck's past, but a necessary event, and then few of the hundreds of other achievements Merck has accomplished over the last 100 years?"
"Because it was in the script that I was given, and I have no understanding of it in any way, shape or form," Bossidy said. "I was just trying to give you a little colorful history."
Let's hope things don't get too colorful this time around. Clark may have had no choice, but the very fact that this deal was done shows how much Merck has lost.
