In the early 2000’s Merck & Co. was on pace to have its most successful decade ever until the creation of the drug called Vioxx. Vioxx was once one of the most prescribed drugs in history; however side effects which caused heat attacks and strokes led to the drug’s abrupt removal from the market. The drug itself was not the reason for Merck’s decline but merely a byproduct of their corporate decisions. This analysis will examine the factors that contributed to Merck & Co.’s decline and what the company has done to reverse its fortune. Also this analysis will offer recommendations to the company to prevent such an event from happening again.
Merck & Co. was once one of the most admired pharmaceutical companies in the United States, but in 2004 the company was dealt a devastating blow. This devastating blow came in the form of Vioxx, an anti-inflammatory drug used to treat arthritis. A side effect of Vioxx caused a number of patients to experience heart attacks and strokes. Before Vioxx was removed from the market, the drug generated sales of over two billion dollars. Although Vioxx is seen as the cause for Merck & Co.’s decline, the real reason for company’s decline can be best described by Jim Collins’s, author of “How the Mighty Fall and Why Some Companies Never Give In”. Jim Collins describes five stages of decline in his book of which two of these stages are experienced by Merck & Co. These two stages are called stage 2 “Undisciplined Pursuit of More” and stage 3 “Denial of Risk and Peril”. Merck & Co. avoided experiencing the fourth stage of decline with their quick decision to remove Vioxx from the market. Had Merck & Co. not made this decision, their recovery would not have happened as quickly as it did and their litigation issues would have been considerably more severe.
Stages of Decline
The first stage of decline experienced by Merck & Co. was the “Undisciplined Pursuit of More”. CEO Ray Gilmartin, in his 1995 annual letter to shareholders, announced that the company’s number one business objective was becoming a top tier growth company (Collins, 2009). Perhaps concerned over the realization that several of their drugs would lose U.S patent protection in the early 2000s, Merck aggressively pursued their growth strategy over the next seven years (Collins, 2009). Merck’s growth was dependent upon creating breakthrough drugs and research and development. According to a Harvard Business case study completed in 2005, the probability of new molecule creating a profit was about 1:15000 (Gilbert and Sarkar, 2005). This aggressive growth strategy coupled with the low odds of creating a new breakthrough drug could lead one to correlate that risks would be taken and that quality would suffer. In 1999 Merck’s latest breakthrough drug was launched, Vioxx.
The second stage of decline experienced by Merck & Co. was the “Denial of Risk and Peril.” In 1999 Merck initiated its largest and fastest launch of their new product, the drug Vioxx. As early as 2000, four years before the drug was removed from the market, evidence existed that Vioxx carried an unacceptable level of cardio vascular risk (The Lancet, 2004). According The Lancet, the evidence presented in 2004 pointed to Merck’s failures of post marketing surveillance and a failure of the Us Food and Drug Administration (FDA). The FDA at the time estimated 27,000 cases of cardiovascular complications due to Vioxx and analyst estimated a litigation bill of over $20 billion (Simmons, 2008). Merck’s reputation was severely damaged along with lost revenues, a diminished market capitulation, the loss of key employees, and the loss of top industry talent. Merck’s stock dropped from $45 a share to $26 a share in a matter of six weeks (Collins, 2008).
Stages of Recovery
Merck’s recovery started in mid-September 2004 with the decision to remove Vioxx from the market. Had Merck delayed their decision to remove Vioxx from the market, their losses would have been substantially higher. CEO Gilmartin continued to market products that were already past the stages of testing and late 2004; unveiled three vaccines based groundbreaking science (Simmons, 2008). These combined vaccines were expected to generate revenues of over $7 billion dollars according to Gilmartin, who left the company five months later. By 2006 Merck gained FDA approval for an additional seven new drugs, more than any other competitor and won a majority of its lawsuits (Simmons, 2008). The addition of the new drugs combined with Merck’s successful in their legal battles caused the stock price to rise higher than expected.
The credit for Merck’s recovery is given to three men, CEO Richard Clark, chief scientist Peter Kim, and legal counsel Ken Frazier (Simmons, 2008). Richard Clark was responsible for coining a new mantra “One Merck” and by integrating company functions they by making them more efficient. Richard Kim was responsible for acquiring new research through acquisitions, restoring morale among current scientists, and reducing the time it takes to put a drug through the last stage of testing. Legal counsel Ken Frazier successfully defended Merck against lawsuits and settled cases at a lower cost. Merck settled the majority of their lawsuits most at a cost of $4.85 billion; $15.billion lower than estimated, while losing only 5 of the 12 cases taken to trial (Simmons, 2008).
Assessing the Company’s Progress In order to accurately assess the company’s progress, a number of performance markers should be put in place. These performance markers should be of the financial and company reputation variety. The financial performance markers should include stock price and the level of increases earnings from the period of decline. To measure the state of the company’s reputation, Merck should periodically issue surveys to healthcare professionals, customers, and graduating seniors prestigious colleges soon to be entering the profession.
Recommendations for the Company
The strongest recommendation for Merck &Co. would be to maintain the strategy of creating products based on ground-breaking science, continuing to fight lawsuits/settling at the lowest possible price, and becoming more efficient (Simmons, 2008). Restoring the image of the company should be the second priority of the CEO. A new advertising campaign should be initiated displaying a newly created mission statement. This mission statement should state a new moral and ethical approach to business and drug research guaranteeing customers that all new products will undergo the best available testing before it reaches the market. The final recommendation for Merck would be to not be afraid of stagnant growth. Industry analyst predicts that the number of drugs protected by patents between the years of 2013-2018 will only be 24 (Cho, 2013). After 2018 the number of protected drugs will only increase by four (Cho, 2013). With this information, Merck should stay the course and not fall into the trap of pursuing aggressive growth once again.
Conclusion In the late 1990’s Merck & Co. pursued an aggressive growth strategy to expand on a base of more than $25 billion. According to industry analyst this was a difficult undertaking that would require new breakthrough drugs. The breakthrough drug Vioxx was launched faster than any other drug in Merck’s history despite evidence that the drug had severe cardiovascular side effects. Was this oversight or disregard of the prior evidence due to the aggressive growth strategy implemented by CEO Ray Gilmartin, and did this strategy lead to company to the third stage of decline “Denial of Risk and Peril”? All of the evidence points to yes. But with a renewed commitment to excellence, and successful legal defenses, Merck will once again return to prominence.