Merck & Co., Inc.

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Merck & Co., Inc.

founded: 1891

Contact Information:

headquarters: 1 merck dr.
whitehouse station, nj 08889 phone: (908)423-1000 fax: (908)423-2592 url: http://www.merck.com

OVERVIEW

Merck is one of the largest pharmaceutical companies in the world. It discovers, develops, manufactures, and markets a broad range of human and animal health products and services. Its Merck-Medco Managed Care subsidiary is one of the largest pharmacy benefit management companies in the United States. Merck's total revenues in 1997 were $23.6 billion, of which about 25 percent came from overseas sales.

Merck focuses on four main business areas. The Research division researches and develops health products for humans and animals at research centers in the United States, Europe, and Japan. Manufacturing is responsible for chemical processing, drug formulation, and packaging operations taking place in 30 plants in the United States, Europe, Central and South America, the Far East, and the Pacific Rim. Product Marketing is responsible for the sale of products in the United States, Europe, Central and South America, the Middle East, the Far East, and the Pacific Rim. And Services Marketing, the Merck-Medco Managed Care Division, manages pharmacy benefits, encouraging the appropriate use of medicines and providing disease-management programs to its customers.

COMPANY FINANCES

In 1997 Merck earned revenues of $23.6 billion and net income of $4.6 billion. Both figures represent an increase over the company's 1996 financial performance of $19.8 billion in revenues and $3.8 billion in net income. Of 1997 revenues, 75 percent was earned in North America ($17.7 billion); 15 percent in Europe ($3.6 billion); 8 percent in the Asia/Pacific region ($1.8 billion); and remaining revenues of $512 million were generated in other countries. Merck reported first quarter 1998 sales of $6.1 billion and net income of $1.2 billion, or earnings per share of $.95, an increase of 16 percent over first quarter 1997.

The company's earnings per share in 1997 were $3.74, up from $3.12 per share in 1996. Merck's stock was performing well, valued at around $133.00 per share in mid-1998. Merck stock's 52-week high was $134.25, and its 52-week low was $80.63 per share.

ANALYSTS' OPINIONS

In 1997 Merck was one of the most widely held stocks in America. Each year, the National Association of Investors issues a list of the top stocks held by U.S. investment clubs. In 1997 Merck ranked third—more than 8,000 clubs held its shares. The stock performed well for shareholders during the mid- to late 1990s. Between June 1994 and November 1996, the price of Merck shares rose from about $30 to $80 per share, and by mid-1998 Merck stock was trading at more than $133 per share.

Despite what appeared to be superior performance by its competitors, analysts viewed Merck as an investment option with "hidden potential," according to a May 11, 1998 article in Business Week. The immediate benefit of purchasing Merck stock was that its shares were trading more cheaply than competitors—investors were willing to pay about twice as much for Pfizer, Warner-Lambert, and Eli Lilly. As reported in Amey Stone's article, "'I love Merck,' says David Saks, a Gruntal & Co. analyst who rates it a 'strong buy' based on its low valuations, promising drug lineup, and record of long-term earnings growth." News affecting analysts' positive outlook for the company included promising drugs in development for arthritis, glaucoma, angina, and migraines. Merck was also investigating in new drugs to treat depression and schizophrenia. However, many felt the company's best growth strategy would be to purchase another drug company.

HISTORY

Merck traces its origins to the seventeenth century, when Friedreich Jacob Merck bought an apothecary in the town of Darmstadt in what is now Germany. Its modern history in the United States dates from the late 1880s and early 1890s, when George Merck joined chemist Theodore Weicker to set up shop in New York. The two Germans produced items such as chloral hydrate, iodides, alkaloids, and other offerings, which they supplied to local apothecaries. In 1899, the company published its first Merck Manual of Diagnosis and Therapy, which remains one of the most widely used medical texts (an online version can be searched at the Merck web site).

FAST FACTS: About Merck & Co., Inc.

Ownership: Merck is a publicly owned firm traded on the New York and Philadelphia Stock Exchanges.

Ticker symbol: MRK

Officers: Raymond V. Gilmartin, Chmn., Pres. & CEO, 57, $2,600,004; Judy C. Lewent, Sr. VP & CFO, 49, $943,334; Edward M. Scolnick, Exec. VP, Science & Technology, 57, $1,514,004; Deborah K. Smith, Sr. VP, Human Resources, 50

Employees: 53,800

Principal Subsidiary Companies: Merck's has one major subsidiary, Merck-Medco Managed Care, Inc. It also has various operating subsidiaries and affiliates throughout Europe, the Asia/Pacific region, the Middle East, and Africa.

Chief Competitors: As a manufacturer and marketer of pharmaceuticals, Merck's competitors include: Abbott Labs; American Home Products; Bristol-Myers Squibb; Eli Lilly; Pfizer; Glaxo Wellcome; Smith-Kline Beecham; Pharmacia & Upjohn; Warner-Lambert; Novartis; Hoescht Marion Roussel; and Rhone-Poulenc.

During World War I, George Merck broke all formal ties with his German family and drug business. He retained control of Merck handing the presidency to his son, George W. in 1925. In 1927 Merck merged with Powers-Weightmann-Rosengarten, a producer and distributor of pharmaceutical chemicals. Merck established its reputation as an outstanding developer of new drugs in the 1930s and 1940s. The company merged with Sharp and Dohme of Philadelphia in 1953, which gave it an overseas distribution network. Merck entered a joint venture with Banyu Pharmaceutical Company of Tokyo in 1954, thus helping to position it in the Japanese market. Merck diversified somewhat in the 1960s and 1970s, but overall remained committed to the pharmaceuticals business. The company joined with DuPont to form the joint venture DuPont Merck Pharmaceutical in 1991. A $2.6-billion deal, the company was formed as an effort to better market drugs in the United States and Europe. (In early 1998 DuPont bought Merck's 50-percent share of the company.) Two years later, Merck bought America's largest pharmacy benefits company, Medco Containment Service.

STRATEGY

Merck's two main growth strategies for the late 1990s, as reported in the Merck 1997 Annual Report, were to utilize research to discover new medicines and to demonstrate the value of its products to patients, buyers, and medical providers. The company's three priorities were: to maximize revenue growth through research, new product launches, and successful marketing campaigns; reach managed pharmaceutical care's fullest potential; and to preserve the profitability of Merck's pharmaceutical business through continuous improvement in productivity and organizational effectiveness.

In the mid-1990s, Merck focused its energies on its core human and animal health businesses and sold off other operations. In 1995 Merck sold its Calgon Vestal Laboratories and Kelco units, both makers of specialty chemicals. It also sold its Medco Behavioral Care Corporation (MDB), a managed mental health care service business. In total, the company received more than $1.5 billion for these three divestitures. In 1997 Merck sold its insecticide and fungicide business to Novartis for about $910 million and, in 1998 DuPont agreed to buy Merck's 50-percent stake in DuPont Merck Pharmaceutical Co.

While Merck was the world's largest drugmaker from 1985 to 1993, by 1998 it remained just behind British Glaxo-Wellcome. This foreign company was formed through a large merger. In 1996, CEO Ray Gilmartin told Business Week that he was not seeking any large acquisitions, which he believed would only be "a distraction." Merck has pursued, however, numerous strategic alliances. It formed joint ventures with Johnson & Johnson, DuPont, and Swedens Astra AB, among other companies.

CHRONOLOGY: Key Dates for Merck & Co., Inc.

1668:: Friedrich Jacob Merck purchases an apothecary in Darmstadt, Germany
1827:: Heinrcih Emmanuel Merck turns the pharmacy into a drug manufactory
1899:: The company publishes the Merck Manual of Diagnosis and Therapy
1903:: George Merck and Theodore Weicker open a production plant in New Jersey
1919:: Merck& Company goes public
1927:: The company is incorporated
1933:: Merck scientists discover vitamin B12
1943:: Merck scientists discover streptomycin, a powerful antibiotic
1953:: Sharp & Dohme, Inc. merges with Merck
1957:: George W. Merck dies and is the last Merck family member to serve as CEO
1976:: John J. Honran becomes president
1985:: Honran is awarded the gold award for excellence in the ethical drug industry
1991:: DuPont and Merck join to form the joint venture DuPont Merck Pharmaceutical
1993:: Merck buys America's largest pharmacy benefits company, Medco Containment Service
1996:: Merck introduces a drug that inhibits the virus that causes AIDS in HIV positive people
1998:: DuPont agrees to buy Merck 50 percent stake in DuPont Merck

INFLUENCES

Merck earned its reputation and much of its fortune through its outstanding research efforts. Through internal growth and a merger, company sales rose from $6 to $13 million from 1924 to 1929. The additional revenue enabled Merck to invest heavily in research and development (R&D). In 1933, the company established the Merck Institute for Therapeutic Research and recruited prominent chemists and biologists to develop new drugs. The following year it assisted in the synthesis of vitamin B1 and won the license to sell it. In 1948 the company discovered B12, a new vitamin considered highly effective against serious anemia. Merck's research efforts also extended to local universities. During World War II, a Merck-funded scientist working at Rutgers University discovered streptomycin, a revolutionary antibiotic used for tuberculosis and other infections. Perhaps the most telling statistic is that five Merck scientists received Nobel prizes during the 1940s and 1950s. In 1997 the company poured $1.68 billion (about 7 percent of its total revenue) into research and development (R&D). About 7,000 people were employed in Merck's research activities in 1997.

Merck took an important step in 1953 when it merged with Sharp & Dohme of Philadelphia. The move gave it a strong sales force and a well-established distribution network overseas. With better resources for market penetration, sales surpassed $100 million in 1957. The company introduced Diuril, an antihypertensive, in 1958, and Indocin, an anti-inflammatory for arthritis, in 1965. By the 1970s, however, the company was introducing relatively few new drugs; it was also gaining a reputation as a poor marketer of its products.

In 1976 John J. Honran became president and helped to turn the company around. Over the next several years, Merck introduced a hepatitis vaccine; a treatment for glaucoma called Timoptic; and Ivomac, an anti-parasitic for animals. It also introduced the very successful Enalapril, a high-blood pressure inhibitor. Moreover, Honran began purchasing foreign drug firms and became more aggressive in licensing foreign products for sale in America. In 1984 he claimed that Merck was the largest U.S.-based drug manufacturer in the world's three biggest markets—the United States, Japan, and Europe. By the end of Honran's reign in 1986, Merck sales reached $3.5 billion a year.

The company continued to do well under biochemist P.R. Vagelos, who ran the company from 1986 to 1994. Merck enhanced its reputation as an innovative developer of new drugs, introducing Mevacor for high cholesterol and Vasotec for high blood pressure. Vagelos also made important strategic moves. In 1990 Merck bought the nonprescription drug segment of ICI Americas, maker of Mylanta; its products were marketed through a joint venture with Johnson and Johnson. But Vagelos' most important move was the purchase of Medco Containment Services (renamed Merck-Medco Managed Care) in 1993 for $6.6 billion in stock and cash. In 1997 it remained the nations largest pharmacy-benefit services company.

CURRENT TRENDS

In the 18-month period from June 1994 to December 1995, Merck introduced eight drugs that had been in development for several years. Merck had never before introduced so many drugs in such a short time-span. These new offerings accounted for roughly 10 percent of Mercks drug sales in 1996, or about $1.2 billion. They continued to spur growth in 1997: Mercks first-quarter sales were up 23 percent to $5.6 billion, and net profits rose 18 percent to just over $1.0 billion.

Merck continued to form new strategic alliances where having a partner seemed most advantageous. In December 1996, Merck announced plans to combine assets with Rhone-Poulenc SA to form the world's largest animal health and poultry genetics company. Merck was the second-largest maker of veterinary and livestock medicines. The new firm, a 50-50 joint venture, was expected to be named Merial Animal Health and employ 1,700 people.

In 1997 the company was still working to absorb its Merck-Medco Managed Care segment (purchased for $6.6 billion in 1993). The division accounted for about one-third of Merck's total revenue in 1996. Medco brokers drug purchases for big benefit-plan buyers, such as labor unions, corporations, insurance companies, and so forth. Since Medco also handles Merck's drugs, the relationship between Merck's pharmaceutical operations and Medco raised questions of conflict of interest. Aside from lawsuits brought by consumer activists and pharmacies, some analysts were also concerned that the Medco unit just wasn't very profitable. They believe it may take quite a few years before Medco begins to make a reasonable return on investment for the company.

In 1998 Merck introduced a new asthma drug called Singulair, a heart attack drug called Aggrasat, and migraine treatment medication called Maxalt. All three products were approved by the Food and Drug Administration.

In anticipation of patent expiration on some of Merck's hypertension and high-cholesterol drugs around the year 2000, the company focused on developing and marketing new products to fuel its growth. Propecia was one of these candidates, but this hair growth formula was going up against well-established market leader Rogaine. Merck also explored a new class of painkillers called COX-2 inhibitors that could potentially be used to treat arthritis.

PRODUCTS

As noted in the Current Trends section, Merck introduced many important new drugs in the mid-1990s. Fosamax works to prevent osteoporosis, a serious bone-weakening disease that affects 1 in 3 postmenopausal women. Cozaar and Hyzaar are the first in a new class of drugs to treat high blood pressure. Trusopt treats glaucoma, Varivax is a vaccine against chickenpox, and Pepcid AC helps control heartburn and acid indigestion.

One highly successful drug that was the source of controversy is Crixivan, an inhibitor of the HIV protease enzyme that is critical to the replication of the virus that causes AIDS. Introduced in April 1996, the drug was approved by the Food and Drug Administration (FDA) in only 46 days, a record. But Merck initially marketed the drug through a single distributor, thus angering many pharmacists and AIDS activists. Merck hoped to widen distribution once it was able to get its manufacturer up to speed.

In March 1997, Merck announced that clinical trials had shown its Propecia product resulted in significant hair growth on a majority of men with mild-to-moderate hair loss. Needless to say, an effective treatment for hair loss stemming from male-pattern baldness would have excellent sales potential.

CORPORATE CITIZENSHIP

Merck makes substantial efforts to be a good corporate citizen. In 1995, it donated products worth over $90 million for humanitarian relief. Some 18 million tablets of Mectizan, a medicine for river blindness, represented half of these donations. Merck also gave a $2-million gift to the American Red Cross to modernize the collection and storage of U.S. blood supplies.

Merck supports education through programs ranging from grade school to post-graduate training to encourage development in the sciences. One example was the company's support of Star-Lab, a portable planetarium that helps explain basic astronomy to students. In 1995 Merck announced a 10-year, $20-million commitment to provide scholarships to outstanding African-American students pursuing careers in biomedical research. Awards are given annually to undergraduate, graduate, and postdoctoral research fellows. Also, The Merck Institute for Science Education works closely with school districts in New Jersey. The National Science Foundation (NSF) uses the Merck Institute as a model for building school/business partnerships and awarded the Merck Institute a five-year, $2.4-million grant in 1996 to expand its programs.

GLOBAL PRESENCE

Merck is a key player in most major geographic markets. Merck's sales outside the United States, conducted mostly through its subsidiaries, represented 25 percent of sales in 1997 and 30 percent of sales in 1996. Of foreign sales, 56 percent were generated in Europe; 27 percent in the Asia/Pacific region; and the remaining 17 percent in other countries. During the late 1990s, Merck was expanding operations in Latin America, eastern Europe, and the Asia/Pacific region—all areas where government change and economic conditions offered good earning and growth potential for the company. Merck believed that while businesses in these areas were less stable, they represented excellent opportunities for long-term growth.

Merck was the fastest-growing pharmaceutical company in Europe. In 1997, Merck's growth was almost three times higher than overall pharmaceutical industry growth in Europe. In 1997 the company strengthened its marketing efforts and acquired Istituto Gentili in Italy. In the Middle East and Africa, Merck established new subsidiaries in Israel and Morocco. They also expanded operations in eastern Europe. In the Asia/Pacific region, Japan was the second-largest national pharmaceutical market in the world, a hot area Merck has targeted for potential growth. And in Australia, Merck was the number one pharmaceutical company, operating through its affiliate, Banyu Pharmaceutical Co., Ltd.

EMPLOYMENT

When CEO Raymond Gilmartin took over Merck in 1994, managers were fiercely fighting for turf, and the company was losing top managers at an alarming rate. Gilmartin doubled the size of the management committee to 12 members and began regular breakfast meetings with employees. He also created "worldwide business teams," which focus on key diseases. In 1997, the changes Gilmartin instituted appeared to have stabilized the company and stemmed the tide of defecting top managers. It has also provided a more favorable working atmosphere. According to Business Week, Gilmartin "pushes staffers to air problems without regard for hierarchy—and without getting personal."

In the January 12, 1998 issue of Fortune magazine, Merck was named one of the Top 100 companies to work for in America. According to Debbie Smith, senior vice-president of Human Resources at Merck, "This testifies to the quality, integrity and dedication of Merck people worldwide. It also illustrates that we're on the right track in integrating all our human resource activities around our leadership model. We realize we can always improve, and we're working to do that, but this is a great honor for all our employees." The list is generated by random surveys of employees and reflects what appeared to be an improved work environment at Merck following an era of relative instability.

SOURCES OF INFORMATION

Bibliography

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merck 10-k and annual report, 1996. whitehouse station, nj: merck, 1997.

merck 1997 annual report. whitehouse station, nj: merck, 1998.

"oral treatment for male pattern baldness shows promise; research results indicate propecia increases scalp hair growth in men." pr newswire, 24 march 1997.

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