The Merck Druggernaut: The Inside Story of a Pharmaceutical Giant

The Merck Druggernaut: The Inside Story of a Pharmaceutical Giant

by Fran Hawthorne

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An in-depth look at big pharma's flagship company The Merck Druggernaut takes readers inside Merck, the world's second most profitable drug company and maker of the world's bestselling drug, Prilosec. Consistently named one of Fortune magazine's Most Admired Companies, Merck struggles to maintain its reputation for being the most ethical of the big drug makers,

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An in-depth look at big pharma's flagship company The Merck Druggernaut takes readers inside Merck, the world's second most profitable drug company and maker of the world's bestselling drug, Prilosec. Consistently named one of Fortune magazine's Most Admired Companies, Merck struggles to maintain its reputation for being the most ethical of the big drug makers, refusing to slash research and development budgets in the face of declining profits, falling stock market prices, and questionable accounting. Author Fran Hawthorne, one of the leading journalists covering healthcare, has written an excellent examination of a business paragon with much-needed insight on the cutthroat world of pharmaceuticals. It's a story that will interest the business world as well as consumer and healthcare advocates by detailing the vital issues in medicine and healthcare today. More than just a compelling story of success in a difficult industry, more than simply the biography of one of big business's most recognizable names, The Merck Druggernaut takes a thoughtful look at some of the major issues of our time and the way those issues intertwine with the world of business.

Fran Hawthorne (New York, NY) is the Assistant Managing Editor at Crain's New York Business. She has been covering business for more than twenty years for such publications as Fortune, BusinessWeek, and Institutional Investor, with a prevailing interest in healthcare and pharmaceuticals. At Crain's, she spearheads the publication of two to three special healthcare issues per year.

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The Merck Druggernaut

The Inside Story of a Pharmaceutical Giant
By Fran Hawthorne

John Wiley & Sons

ISBN: 0-471-22878-8

Chapter One

In the Bull's-Eye

On a February morning, snow is falling lightly outside Kathy Maglione's fifth-grade classroom in the blue-collar town of Linden, New Jersey, some 10 miles south of Newark. Gianna, Amanda, and Raquel are in close consultation at a table near the back, huddled over a clear plastic funnel and some coffee filters, screen filters, disposable cups, and plastic bags. They are variously pouring gravel, salt, and diatomaceous earth-earth containing the ground-up remains of tiny aquatic organisms-into cups of water; then, they'll try to separate the ingredients again by pouring the mixtures through some kind of filter.

"I don't think the sodium chloride will go through this."

"Well, I don't want to use a coffee filter. The powder will go through it."

"Are you serious? This is grounded-up bones?"

"We're touching people's bones here?"

"The salt won't go through. It's too thick."

"It's not people's bones, it's animals."

Two months later and 30 miles away, on an unusually chilly late-April afternoon, a fleet of blue buses ferries several hundred shareholders across the wooded, dandelion-strewn sprawl of Raritan Valley Community College to the 2002 annual meeting of Merck & Co., Inc.

The mood in the purple and burgundy college auditorium is amiable and polite. Most of thequestions to Raymond V. Gilmartin, the company's chairman, president, and chief executive officer, are on the order of, Why is my pharmacist always out of Timoptic eyedrops? or, Are you doing any research into obesity? The officially nominated directors are all approved; the unofficial shareholder resolutions are all defeated. Everyone nibbles melon slices and chocolate pastries.

The amiability is tinged with resignation, however. The past six months, for people who own pharmaceutical stocks, have been a long parade of bad news. Patents on numerous key products are expiring-five for Merck alone. Earnings at many companies are flat or falling, and even firms with good numbers are seeing their share prices slide. But it's not just the financials that are nagging at the people in the Raritan Valley auditorium. Every day some government official or consumer group in the United States is questioning something the industry does. Even as Gilmartin is fielding the queries on eyedrops and obesity, the chairman of the Federal Trade Commission is complaining to the Senate Committee on Commerce, Science and Transportation about the way pharmaceutical companies try to keep less expensive generic drugs off the market. Congress is considering an array of measures that challenge the industry from every angle, measures to allow cheaper drugs to be imported from Canada, to make it harder to block generics, to tighten the rules on clinical testing, to put more restrictions on advertising, and-the granddaddy of them all-to add prescription drugs to Medicare coverage, with the potential that would bring for regulating prices. State politicians, too, are pressuring the industry to lower prices by filing lawsuits and demanding discounts for their Medicaid programs.

Worse news-though the retired Merck scientists and secretaries in the purple auditorium don't know it-is yet to come. Within the next three months, there will be regulatory questions about their company's hot new arthritis drug and accounting questions about its Medco subsidiary, and their stock's value will plummet.

A onetime administrative assistant has stock options that will expire at the end of the year. "I might as well throw them out," she jokes bleakly, staring at herself in the ladies' room mirror.

"It's almost like pin-the-tail-on-the-donkey, which pharmaceutical company you buy," shrugs a former temp worker who lives in one of Merck's hometowns.

Sheldon Schwartz worked at Merck for 14 years in the 1950s and 1960s, rising from mailroom to marketing. Now he does industrial lighting, and he's worried about the implications of some of the news stories he's read. Why does one say Merck is going "back" to basic research? Hasn't Merck been doing research all along? Why doesn't Merck have more blockbuster drugs ready to replace the ones that are about to go off patent?

He's been going to the company's annual meeting for years. But this time, he says, "it's not the same."

Both these scenes are stories of Merck.

The first is the story Merck likes to tell the world-the Merck of the two legendary leaders, George W. Merck and P. Roy Vagelos; the Merck beloved by small investors; the Merck that discovered a treatment for river blindness in Africa and then handed out the drug for free. This Merck develops groundbreaking medications for tuberculosis, high cholesterol, osteoporosis, and AIDS. This Merck is also an upstanding member of the community. It provides child care for its employees. It gives away tens of millions of dollars.

In that fifth-grade classroom, Gianna, Amanda, and Raquel were part of a unique 10-year, $20 million project that Merck launched in 1993 to completely revamp the way science is taught in four New Jersey and Pennsylvania school districts, including the one where Roy Vagelos graduated from high school in 1947. With its own money plus $2.5 million from the National Science Foundation, Merck hired consultants, trained hundreds of teachers, sent some of the teachers out to Arizona and to Washington, D.C., for further training, bought new science materials, helped set up community science fairs to draw in parents, arranged professional evaluation, and essentially rewrote the curriculum for all the districts' elementary and middle school science classes to emphasize learning by doing rather than learning by textbook reading.

"If it weren't for Merck, this initiative would not have happened," said Dolores Maslo, the tall, elegant, perfectly coiffed director of science for the Linden public school district, as she showed off class after class on that snowy February morning. There was a glimmer of tears in her eyes.

That Merck certainly exists. However, it was the second Merck that looked to be the Merck of the twenty-first century-its labs struggling, its profits slipping, and under attack from politicians, consumers, doctors, other businesses, and insurance companies.

Of course, it was not alone. All the multinational pharmaceutical giants-collectively known as Big Pharma-were facing an overwhelming and unprecedented barrage of scientific, financial, and political problems, much of it their own fault. But that was just the point. Merck was supposed to be different from the rest. If even Merck couldn't come up with good drugs or win the public's love, then the industry really was in trouble.

To understand what was happening to the pharmaceutical industry as the twentieth century moved into the twenty-first, the best place to start is probably with the dollars. Politicians, employers, and patients saw general inflation rising only 3 to 4 percent, overall health care up 5 to 7 percent, health insurance premiums jumping 12 to 14 percent-and spending on prescription drugs soaring almost 20 percent. News stories showed grandmas forced to choose between food and medicine, or elderly couples taking turns filling their prescriptions each month because they couldn't afford two sets of pills. Then, in the same newspapers and magazines, the business pages reported that the pharmaceutical industry was raking in profits of 17 or 18 percent, making it the most profitable industry in the United States. The public connected the dots: Big Pharma is making obscene profits from the pockets of starving grandmothers....

Overseas, the headlines were even worse. Millions of impoverished children were suffering from AIDS in Africa and Brazil. Lifesaving medication was available, but incredibly, the drug makers were charging the same $10,000 to $12,000 a year that they billed in the United States. Under the glare of publicity, the companies slashed their prices, to the point where they claimed they were just breaking even. The price cutting didn't do much for their image, however, because they seemed to be dragged kicking and screaming to do it.

Actually, there were plenty of drug companies eager to provide the most popular drugs cheap: generic drug-makers like Barr Laboratories, Inc. and Mylan Laboratories Inc.

The way it was supposed to work, under a 1984 U.S. law governing drug patents, was that the big pharmaceutical companies would do the research, discover the drugs, and get exclusive rights to market the products at their comfortable profit margins for, typically, 20 years. Then, the generic drug makers would get to jump in with copycat versions, selling for one-fifth or less of the patented drug's price. Health insurance plans would include financial incentives to encourage people to use the generics. At that point, the so-called branded companies would forget all about their old drugs and go discover new ones.

That was all very nice in theory. But when the crunch came-as a rush of blockbusters began to come off their patents like dominoes between 2000 and 2002, including such make-or-break names as the allergy pill Claritin and the antidepressant Prozac-the theory fell apart. Instead of simply kissing good-bye to their steady moneymakers, the industry desperately began looking for new ways to patent the old drugs in order to eke out another 6, 12, or 30 months of exclusive rights and keep the generics off the market. Anything would do: the markings on the pill, the color of the bottle it came in, or the chemical compound it produced in people's livers.

In their defense, the pharmaceutical companies pointed out that groundbreaking new drugs don't grow on trees, or even in too many test tubes. Experts argued about how much it really cost to discover the average new drug. Was it $200 million? $500 million? $800 million? Still, there wasn't much debate that it's a long, hard, expensive slog. Although the industry upped its spending on research by close to 70 percent (after inflation) from 1990 to 2001, the number of new drugs approved by the Food and Drug Administration (FDA) pretty much held constant, at around 30 per year, according to The Boston Consulting Group. In other words, more money did not buy more results.

Again, though, as with AIDS, the industry managed to pull the rug out from under its own defense. A sizable number of the FDA approvals weren't for new cures for cancer or other serious ailments; they were for questionable "improvements" to existing brands or the fifth cholesterol drug of the same type. Instead of focusing their millions of research dollars on cures that were needed, too many drug makers took the easy way out.

The mapping of the human genome was supposed to be the answer to Big Pharma's research problems. Yes, it had given the industry an important new tool, and computer modeling had made research faster and more efficient. But the study of genes was turning out to be even more complex than expected. There are something like 30,000 genes in the human genome, each of which can produce up to a dozen proteins, which in turn may (or may not) catalyze a reaction that will act on a particular disease. It could be 2010 or later before any products from genomics research would be ready for market-by which time a lot more patents would have expired.

And after all that, after struggling through those years of decoding and genomics research, what kind of product would the pharmaceutical labs end up with? Most likely a narrowly targeted niche drug that wouldn't make much money.

All of which meant that, even as the public was howling over obscene profits, the days of 18 percent returns might not be around much longer. For many companies whose hot-selling drugs had lost their patents, those days were already gone.

So if big new products were going to be sparse and the generic drug makers couldn't be blocked, the pharmaceutical industry turned to the other tried-and-true business strategy for pumping up the bottom line: marketing. From time beyond memory, drug companies had wooed doctors with everything from free samples to doughnuts to hard-to-get theater and sports tickets, hoping the doctors, in return, would prescribe their drugs. Then, in 1997 Big Pharma was handed a magnificent new weapon, thanks to changes in federal rules-TV advertising. The companies poured in a billion dollars, then two, then two and a half. They hired the best of Madison Avenue, who in turn brought in celebrities like Olympics skater Dorothy Hamill and erstwhile presidential nominee Bob Dole. The aim, Big Pharma said, was to "empower" consumers so that they would crack their doctors' omniscience and demand the brand-name medication they saw on TV. Unfortunately for the pharmaceutical world, it's hard to calibrate empowerment.

Pretty soon, people started asking a lot of questions, and the questions weren't necessarily, "Will you prescribe Vioxx for me?" AARP, the powerful lobbying group for seniors, warned that the ads might entice people to demand expensive medicine they didn't really need. Believers in natural health said American society relied too much on pills, anyway. Ethicists worried that there was something wrong about advertising serious medicine as if it were toothpaste. Consumer advocates said that all the money that was going into commercials ought to be used instead to keep prices down. Doctors weren't exactly thrilled to have their opinions challenged (or to waste nonbillable hours arguing with patients). Even the hoary old wining and dining of physicians came under so much attack that the industry's trade group, Pharmaceutical Research and Manufacturers of America (PhRMA), had to produce a code of conduct drastically curtailing all the freebies.

Popular culture was quick to latch onto the newest villain. In 2001, John le Carré came out with a thriller, The Constant Gardener, about a rapacious pharmaceutical giant that hides evidence of the fatal side effects of its TB drug and blithely kills anyone who threatens to reveal the truth. Within that same year, two other novels also featured greedy drug companies or overdependence on prescriptions. The hero of the 2000 movie The Family Man, in his soulless Wall Street incarnation before he discovers the True Meaning of Life, finds his greatest satisfaction arranging a multibillion dollar drug company merger

To Frank R. Lichtenberg, a professor of economics and finance at Columbia University's Graduate School of Business in New York who specializes in the pharmaceutical industry, the outpouring against the big drug giants wasn't all that surprising. "If their access to pharmaceutical products is limited by price or other reasons, people get upset," he points out. "That's testimony to the pharmaceutical companies' activity and their contribution to society."


Excerpted from The Merck Druggernaut by Fran Hawthorne Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Meet the Author

FRAN HAWTHORNE, a senior contributing editor of Institutional Investor, has connections deep within the business and finance communities. Hawthorne has been covering business and healthcare for more than twenty years for such publications as Fortune, BusinessWeek, and Crain's New York Business. She is the author of Inside the FDA, which is also published by Wiley.

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