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Articles by Donald E. L. Johnson

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What Merck has to do to remain an independent drug maker

Merck & Co. faces more than product pipeline challenges and multi-billion-dollar product liability law suits by users of its problematic (to say the least) Vioxx drug and their heirs. Assuming the $22 billion company wants to be an independent, major power in the drug industry, it must restructure its board, hire a new chief executive officer and develop strategies to turn 10 major obstacles into growth opportunities and to maintain what have been enviable profit margins. -more-


Merck & Co. faces more than product pipeline challenges and multi-billion-dollar product liability law suits by users of its problematic (to say the least) Vioxx drug and their heirs. Assuming the $22 billion company wants to be an independent, major power in the drug industry, it must restructure its board, hire a new chief executive officer and develop strategies to turn 10 major obstacles into growth opportunities and to maintain what have been enviable profit margins.

Merck’s new CEO will set the tone for the company. He or she will become the company’s top strategist, marketer, promoter and human resources manager. The challenge is to find a physician or scientist who has managed several big companies, turned one or two around and has become a winning and authoritative CNBC personality like GE’s Jeff Immelt. Whether promoted from within or hired from outside, the new CEO will need at least three years to build a team, redirect the company and turn it around. But, given the right CEO, the stock should begin to rally as soon as the new personality hits the airwaves.

This means that the board should instruct its head hunters to find an executive like John Rowe, M.D., 59,  the CEO of Aetna.  Merck needs a seasoned executive who is a physician or scientist as well as a successful executive and entrepreneur. This person has integrity and credibility with physicians and scientists, communicates well with consumers and investors, thinks strategically and acts like a portfolio manager (i.e., Jack Welch). He or she hires strong people who can execute the strategic plans and adjust quickly and ethically to ever changing market, technological and political conditions.

Before Merck turns the head hunters loose to find a CEO, however, it needs to replace many of its board members with strong directors who have turned companies around and hired and mentored equally outstanding successors. They should bring legal, scientific, political, marketing and financial expertise to the table. Merck’s directors should be people who know how to use their experience and talents to provide strong, ethical governance, not run the company.

After Merck recruits a new CEO, the new board should charge him or her with assessing and solving the numerous scientific, political, financial and marketing obstacles facing the company and its industry. They include:

1. Public anger about soaring drug expenditures and “prices,” which is being reflected in grand standing by powerful politicians.
2. Purchasing groups that are being formed by groups of states, which are trying to contain runaway drug spending by their underfunded and expensive Medicaid programs.
3. A shaken FDA, which is being blamed for letting Vioxx, Celebrex and other drug mishaps go undetected and unregulated.
4. Suspicious physicians, known for willingly taking “gifts” and “grants” from pharmaceutical companies’ detail people, but unhappy about being misled by the drug makers and about their direct-to-consumer advertising. They must believe that what they see as unethical marketing by drug companies has made them look unethical. It has.
5. Price-conscious institutional buyers of drugs that will take advantage of any sign of weakness to demand price breaks and help in containing the use of high-priced, marginally more effective “new” drugs.
6. Wary patients, worried about drugs’ side effects, high prices and the credibility of drug companies may be less likely to have their prescriptions filled.
7. Scared senior employees who will abandon ship at the first opportunity unless they see an imminent turn around.
8. Jilted investors who are on a buyers’ strike and will sell whenever Merck’s stock rallies anywhere close to their break even points.
9. Trial attorneys and patients with dollar signs in their eyes.
10. Medical journal editors who believe that their credibility has suffered with Merck’s and the drug industry‚Äôs. They will be very reluctant to publish articles about any medical research if they believe that any company has had a role in writing, editing or approving a journal article.

How might Merck turn these obstacles into opportunities and grow the business? There is no one strategy or tactic, and the suggestions offered here obviously are subject to debate, refinement and rejection by those who will be held accountable for whatever actions Merck takes. Here are some ideas and thoughts:

1. Answer the price question by announcing that Merck will price all drugs the same, worldwide, adjusted for the relative consumer purchasing power of the countries that import and buy its products. Threaten that it will withdraw its products from countries that refuse to pay fair prices. Make it clear that any country that violates its patents in retaliation will be taken to court in the U.S. Promise that Merck will lead its industry and American consumer groups in lobbying for retaliatory trade measures against offending countries. Play hard ball for the consumer.

2. Back in the mid 1970s, when hospitals formed the VHA and other group purchasing organizations, American Hospital Supply’s late CEO and super salesman, Karl Bays, agreed to exchange big discounts on high-volume items for long-term contracts, especially those where the VHA’s members agreed to commit to buying under those contracts. And the rest of the big players in the medical supply industry followed, thereby preserving their profit margins and market share. They granted huge discounts on high-volume consumables and commodity items. Over time, they also raised their prices on their patented, physician preference products and dropped unprofitable products as companies operating under price controls always do. Thus, Merck should champion the states’ drug purchasing groups. Give them big discounts on long-term, committed volume contracts for generic drugs. Make the politicians and Medicaid directors look like heroes without giving up overall profitability or market share on truly exclusive, patented products—-those for which there are no therapeutic substitutes. Play the game to win. Drug companies have been winning this game with HMOs for years. The new CEO and some board members should have experience with purchasing groups and government contracting. 

3.  Large auto makers support onerous environmental and safety regulations, which serve as barriers to entry by smaller competitors; large drug companies play the same game with the FDA. Both auto makers and drug companies game the system to their advantage, but drug companies, including Merck have had their way so much that the public and politicians have caught on and want to change the game. Merck should lead the way in recommending FDA reforms that raise the barriers to entry and make it harder to stay in the business, because it has the resources to make strong regulations work for itself as well as for consumers. He who writes the specs gets the deal. Merck should encourage Congress to fund FDA research on the efficacy and safety of patented drugs on the market. It should fund on-going, research on its own products after they have won FDA approval. And it should fund unbiased physician education programs that help physicians understand how drugs should be used appropriately and cost-effectively. The goal should be to ensure itself and its customers that its products are safe and that the “Merck Manual” has credibility.

4. Phyicians, like everyone else, must be won over and convinced that Merck has their best interests at the top of its agenda. For physicians, the most important things are their personal incomes and security and the welfare of their patients, in that order. Docs are humans, too. Win the support of physicians by funding objective, counter-detail seminars on the classes of drugs that Merck sells. Create specific courses for each medical specialty and sub specialty, and make sure that each seminar teaches pharma economics as well as clinical information. Produce and sell drugs that will win in their classes and get rid of product lines that aren’t number one in their classes in cost effectiveness, safety and efficacy. Price accordingly. Call off the detail dogs, who aren’t trusted by physicians and, according to recent research, may be less profitable than conventional wisdom suggests. The Wall Street Journal reported in its Dec. 20 edition that pharmaceutical spend some $8 billion a year on detail people and $4 billion on direct-to-consumer advertising. Spend part of the marketing dollars saved by laying off detailers on sponsorships for a nightly, prime-time consumer-oriented health and medicine talk show on MSNBC or CNBC. Allow physicians and consumers to ask questions and comment on blogs and message boards. No holds barred. Docs will watch and learn from the discussions and from Merck’s detailed commercials that will separate the talkers from their viewers.

5. Drug companies are under pricing pressure from Medicaid programs, managed care organizations, pharmacy benefit managers and other institutional buyers as well as consumers and their political representatives around the world. All the value-added programs in the minds of promotion agencies won’t solve this problem. Merck should announce that it is cutting its marketing budget in half and that it will cut drug prices accordingly. It also should announce that it will help institutional buyers cut the inappropriate use of its most expensive drugs in half in 24 months, which will save all payers billions of dollars. And it should announce that it is laying off enough employees to preserve profit margins, if not increase them.

6. Regain public confidence in all Merck products by supporting the publication of both positive and negative product reviews and articles in medical journals, consumer publications and on Merck’s web (more on this in No. 10 below). Provide easy-to-comprehend product comparisons, benefits lists and descriptions of possible side affects. Sponsor disease and product message boards and blogs where Merck employees, physicians, patients and industry critics can exchange ideas and opinions, no holds barred so long as there is no flaming of message board members or competitors.

7. Make quick decisions about any layoffs, if any more are required, execute those plans immediately and give remaining employees strong financial incentives to work on the turn around. Be sure to fire managers and employees who are very turf-protective and passive aggressive change obstructors, if you can do so without firing everyone. (Overcoming employee resistance to change will be critical. Ask the airlines.)

8. Win investors back by outlining Merck’s turnaround plan in great detail. Publishing the company’s strategic plan will win talk show invitations for the company’s CEO, giving him or her the opportunity to convince all concerned that she and the company are smart, creative, courageous and sincere winners who will make money for shareholders by being upfront and boldly out-of-the box in the marketplace. (Bonus: A great turn around strategy and CEO will make it easier to convince truly creative startup biotech companies to sell out to Merck in exchange for its appreciating stock. When it comes to product development, Merck must buy promising drugs from independent developers and others.)

9. Go over the heads of trial lawyers. Consider mocking and nullifying them. Use consumer and trade advertising to ethically educate potential jurors and all of Merck‚Äôs important publics. Advertise the cost of negotiating settlements with lawyers and of defending the company in trials. Offer quick, generous settlements for legitimate Vioxx product liability claimants who deal directly with the company or use lawyers willing to work for a $2,000 to $10,000 fee. Also announce that nuisance suits and unprincipled lawyers will be challenged in courts—-there will be no out-of-court buyouts of dishonest gold diggers who have no chance of winning court battles. Indeed, they and their lawyers will be counter sued, and when possible debarred.

10. To rebuild credibility with physicians, journal editors, researchers and opinion leaders, announce Merck’s support for full disclosure of the results of drug trials. Call for and fund spirited debate about drugs and medical devices in medical journals, on the internet, on talk shows and in other forums. Advertise only in medical journals that publish articles that report both negative and positive research results and that require researchers to defend their reports against critical reviews in the same issues in which their articles appear. The goal should be to give physicians and patients honest,  well-designed and well-executed studies. As much as possible, these studies should produce clinical and economic information that can be applied and communicated to patients by practicing physicians as well as the media. All journal articles should be written in language that patients with fifth-grade reading skills can understand and comprehend. This will increase comprehension by physicians and other clinical professionals as well.

A skillful board, CEO and management team will refine and use this strategy and these tactics to turn the challenges facing Merck into profitable opportunities and grow the company, making its stock a market leader instead of a market laggard, or they won’t.

Posted by Donald E. L. Johnson on 12/20/2004 at 09:26 AM

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