Merck: Embracing Externalization, From the Top Down

Updated Below. One business magazine greeted the tenure of Dick Clark as Merck's new CEO in 2005 with the instruction to "say hello to boring," Roger Longman reminded the audience today at PSA. Investors will be clamoring for more boring if that's what has spurred Merck's shareprice onward and upward over the past two years.

Our Pharmaceutical Strategic Alliance conference kicked off this morning with Roger's Q&A with the Merck CEO, in a discussion that focused on the changes implmented by Clark over the past two years and the challenges faced both by Merck and the industry as a whole.

Clark said many of the things you'd expect a CEO to say. He talked about putting patients first, talked about unmet needs and striving to discover and develop strongly differentiated products. He acknowledged the industry's regulatory challenges and difficult reimbursement environment. And he deflected much of the credit for Merck's recent success to the pharma's employees in general and the interdisciplinary, horizontal and empowered teams that were behind the success of recent launches of Januvia and Gardisil in particular, as well as the timing of his appointment, suggesting his predecessor Ray Gilmartin had put necessary processes in place that have helped the company succeed today, not least hiring Merck's current research head Peter Kim.

And while the executive has spent his entire working life at Merck, he credits his several years at Medco--then Merck's PBM subsidiary--with providing him an external perspective on the company that once felt that the only good science was the science done in its own laboratories.

Externalization, both as an industry meme and in practice at Merck is becoming more important. "Medco allowed me to take an outside-in approach at Merck," Clark says. It's an approach that has more or less been embraced company wide. Only a few years ago, Clark noted, Merck did only a handful of licensing deals per year. "Last year we did something like 53," he said, pointing out acquisitions like the recent NovaCardia deal, and large molecule platform building moves like buying GlycoFi, Abmaxis, and Sirna. Scientists and managers within Merck are no longer rewarded based soley on what they can develop and create in-house, but for what they can bring into the company from the outside as well.

And there is still a ways to go, says Clark. "It’s important to understand that Merck hasn’t declared victory yet, that we’re about 40% of where we want to be and there’s still a lot of work to do." The danger, he says, is to revert to an internal focus.

Commenting on the $1.1 billion acquisition of Sirna in the RNA interference space, Clark emphasized the importance of continuing to augment its platform with the best available technologies. "I don’t think it ever ends, the external focus has to continue. If you raise your hand and write a billion dollar check," you need to make sure you're putting the right tools to work to execute your strategy.

UPDATE: The WSJ's Health Blog dropped by this morning. You can read their take on Clark's talk here.

Insight + Preparation + Dumb Luck = Blockbuster

This blog has spilt plenty of bytes on the nasty consequences for GlaxoSmithKline, and for the industry, of the Avandia problem – but we haven’t said much about who’s likely to benefit. That part of the story we left to The RPM Report – and you can see that analysis here.

As Kate Rawson notes in that story, the two biggest big beneficiaries are Merck’s Januvia – the only DPP4 inhibitor on the market—and Amylin/Lilly’s Byetta. But Januvia is in many ways a more interesting business case study – and one we’ll talk about in a public fireside chat with Merck CEO Dick Clark at Windhover’s annual shindig in New York for the industry’s top business development executives, Pharmaceutical Strategic Alliances.

Clark -- pictured right -- ain't exactly the pin-up CEO. He's a manufacturing guy, from the blue-collar neighborhood of the drug industry. But he's managed a turnaround at the otherwise very white-collar Merck of impressive proportions, this being the company, that not so long ago, looked like a cartoon Gulliver hogtied by thousands of litigious Lilliputions.

And as Clark and I will discuss at the PSA meeting, much of that success is due to Januvia, the product of a nearly perfect blend of scientific insight and strategy, management skill and dumb luck.

Trailing Novartis by four years, Merck’s DPP4 team not only built a molecule that avoided one of the receptor subtypes hit by Novartis’ compound, Galvus, they managed to convince the FDA – although no one is saying so, publicly – that by doing so they’d made a safer drug. Thus Januvia never got hit with the FDA scrutiny Galvus did – and ended up with a safety label so compelling (a side-effect profile comparable to placebo) that this once-a-day pill, noted one diabetologist, has become “the first truly simple-minded therapy in diabetes.”

And probably the fastest beginning-to-end development program for any first-in-class primary-care drug in recent memory (seven years from discovery initiation to approval). Indeed, Clark and research chief Peter Kim had decided – given the company’s thin late-stage pipeline -- that Januvia was one of two drugs (the other was Gardasil, the cervical-cancer vaccine) absolutely crucial to Merck’s recovery from its disaster with Vioxx.

And so Clark created a multi-disciplinary task force around the compound, with its boss reporting directly to him. Bureaucratic hurdles fell away. And the launch was as nearly perfect as a major primary-care launch can be – five months after launch, the drug had captured a greater share of attention (nearly 40%) than nearly any of the recent successful primary-care launches. And it’s now on target for what analysts think could be $775 million in first-year sales.

(We should mention that Clark did the same thing – another multi-disciplinary task force reporting directly to him -- with Gardasil – on track for $1.5 billion in worldwide full first-year sales.)

And then there’s dumb luck. Januvia has been the extraordinary beneficiary of the misfortune of others--the Galvus approval delay, in the first place, and now Avandia. Merck therefore took 100% of the profit from the excitement Novartis helped generate around the arrival of a brand-new anti-diabetic class—but none of the negatives of Galvus’ apparent side-effects. Likewise, it’s taking the lion’s share of Avandia’s lost prescriptions.

And all of this despite the fact that Januvia ain’t that great a drug. Good as an add on. But not particularly powerful in itself. Instead, Januvia is the perfect drug for our era, when safety—particularly mixed with extreme simplicity--sells far better than efficacy alone.

The PSA conference will be a good time to question Clark on just how much a CEO matters in creating a blockbuster. We forecast his answer this way: some -- but dumb luck sure helps.