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Merck's Mr. Nice Guy With A Mission



How Ray Gilmartin is changing Merck's turf-conscious culture

When Raymond V. Gilmartin, the amiable new Merck & Co. chief, sat down with each of the company's top 40 or so executives for get-acquainted sessions two summers ago, the agenda seemed obvious. An outsider to both Merck and the pharmaceutical business, Gilmartin, previously head of medical-gear maker Becton Dickinson & Co., humbly admitted he had lots to learn. "What do you think are the major issues we need to resolve?" Gilmartin diligently asked each manager, and "If you had my job, what would you focus your time on?"

What was less obvious was that the unassuming Gilmartin--a man who actually blushes when complimented--was auditioning each manager. The roles to be filled: slots on the dozen-member management committee he was assembling, a broad-based group that would end Merck's longstanding leadership by a tiny cadre. One executive recalls that his one-on-one with the new boss lasted two hours and involved plenty of give-and-take. By the time Gilmartin had finished the interviews, "I was able to put people in place that the rest of the organization said: `Absolutely, they're the right people,"' says the CEO.

He comes across as warm and even earnest, but Gilmartin, a onetime management consultant, is also surprisingly shrewd. And in his nearly 2 1/2 years at Merck, he has deliberately gone about fostering a new atmosphere of collegiality at the $19.8 billion drugmaker. Without criticizing his predecessor, the much admired physician-CEO P. Roy Vagelos, Gilmartin has quietly dismantled the turf-conscious, defection-ridden culture Vagelos left behind. He has managed to hang on to respected research chief Dr. Edward M. Scolnick, who vied for his job, and innovative Chief Financial Officer Judy C. Lewent, a favorite of headhunters. And he has restored morale in the ranks with such gambits as regular breakfast meetings with staffers.

Before Gilmartin arrived in June, 1994, Merck, once Wall Street's darling, was stumbling badly, and "a bunker mentality" had taken hold, says a former executive. Hobbled by uncertainty about who would succeed Vagelos when he retired in November, Merck was also wrestling with the ascendancy of managed-care drug buyers, even as the early Clinton White House threatened price controls. Then, in 1993, Merck shelled out $6.6 billion for Medco Containment Services Inc.--a still unproven plunge into managing drug benefits. The company's most highly touted new drug, the prostate-shrinking Proscar, was falling vastly short of expectations. Sales growth slipped into single digits, earnings tumbled, and Merck's stock plunged from a high near 57 in January, 1992, to 28 3/8 in April, 1994.

Gilmartin stepped from the triumph of a turnaround at far smaller Becton Dickinson into the maelstrom at giant Merck. Betting that a clear chain of command and an explicit strategy would end the staff's lingering unease, he rapidly assembled his management committee. True, he risked alienating those he passed over. But as a CEO, he says, "you make unpleasant decisions all the time."

Indeed, Gilmartin bristles at the thought that he's a mere Mr. Nice Guy. "`Nice guy' sort of implies that you want to get along, have camaraderie, make everybody happy. That's not the way I operate," says the 55-year-old electrical engineer. "The way I do operate is to be receptive to other people's ideas and to basically respect what they do. I get a lot in return."

At Merck, what he has gotten is performance. In the latest full quarter, Merck's net income hit $1 billion--up 28% over the third-quarter profit in 1994, soon after Gilmartin arrived. Third-quarter sales over the two years climbed 28.7%, to $4.98 billion. Full-year net income for 1996 is expected to be 29% higher than for 1994, while annual sales show a 32% rise. Most dramatically, investors have vaulted Merck's stock from 30 3/4 on June 8, 1994, the day before Gilmartin's appointment, to a high of 80 7/8 on Nov. 11. This increase, nearly 162%, set the pace for the Standard & Poor's index of major drug stocks, which has climbed about 156% since mid-1994.

Without question, the key force driving Merck's recent performance was gathering strength before Gilmartin took charge. In the 18 months after he joined, Merck introduced a record eight drugs, all of which had been in development for years. Among them are the AIDS treatment Crixivan, the osteoporosis drug Fosamax, and the antihypertensive Cozaar. Analysts estimate that the eight will account for about $1.18 billion in sales--roughly 10% of Merck's drug sales--in 1996. Joking that his main accomplishment was smartly timing his arrival, Gilmartin freely gives credit for these drugs to research chief Scolnick.

What Gilmartin gets credit for is having enough skilled managers left to shepherd the drugs' launches. In the year before he was hired, Merck began losing talent at an alarming rate. Two aspirants to the CEO's job--President Richard J. Markham and manufacturing chief John L. Zabriskie--left for rivals. A third, Merck-Medco Managed Care Inc. head Martin J. Wygod, went to a small health-care acquisition firm. Three months after Gilmartin's arrival, two other contenders, Executive Vice-Presidents Jerry T. Jackson and the late Francis H. Spiegel Jr., retired.

EXODUS. To calm the roiled waters and stem the exodus, Gilmartin has employed a series of team-building strategies intended to promote a cooperative spirit and eliminate back-stabbing and jockeying for power. "Everyone recognized right away that was not a successful personal strategy," he says dryly.

With twelve members, the management committee he put together is twice the size of Vagelos' so-called chairman's staff. Gilmartin tapped sales managers in Europe and Asia, veterinary and vaccine division leaders, a top Medco executive, and chiefs from manufacturing, finance, and law. He wanted broad participation, he says, because that way, "you only have to make the decisions once."

To develop rapport among the team's members, Gilmartin took them away for a three-day shirt-sleeves retreat in October, 1994--a departure for rigidly hierarchical Merck. Gilmartin, who spent eight years as a consultant with Arthur D. Little early in his career, thinks off-site meetings break down barriers and build mutual confidence. "What goes on during the breaks and during the dinners or lunches is often just as important" as what goes on in the meetings, he says. For instance, over cocktails and dinner at Merck's third such retreat, held last June, Scolnick and sales executives settled on a process for evaluating drugs developed outside the company that Merck might want to license. Insiders say that back at the office, time pressures, hidden agendas, and worries about turf might have scuttled the idea.

To lay to rest uncertainty about Merck's direction, one of the management committee's first acts was to compose a mission statement affirming that Merck would remain a research-driven pharmaceutical company, eschewing diversification. Backing up the words, Gilmartin quickly shut down a generic-drug operation and has since sold off more than $1 billion in assets, including the Calgon Vestal Laboratories and Kelco specialty chemicals businesses and a managed mental-health-care unit. He told Wall Street that Merck was not looking for major acquisitions. Although it was the world's biggest drugmaker from 1985 to 1993, mergers have thrust it behind Britain's Glaxo Wellcome PLC and Switzerland's Novartis, in a third-place tie with Germany's Hoechst Marion Roussel. But a merger would be "a distraction," Gilmartin says.

Gilmartin's understated style seems rooted in his modest beginnings. He grew up on Long Island, in Sayville, N.Y., where his sister and brother still live. His father was a construction field superintendent. Gilmartin earned his BS in electrical engineering from Union College in Schenectady, N.Y., in 1963, then spent three years as a development engineer at Eastman Kodak Co. before entering Harvard B-school. After eight years with Arthur D. Little, he joined Becton in 1976 as vice-president for corporate planning. Named president in 1987, CEO in 1989, and chairman in 1992, Gilmartin says he was expecting to spend the rest of his career at Becton when headhunters for Merck came calling.

Gilmartin says his late father helped shape his mild manner. "He said people who have a need to tell you how tough they are you never have to worry about," Gilmartin recalls. "The people that are really tough never have to tell you that."

In addition to participating in the health-care industry's most influential lobbying groups, Gilmartin is volunteer chairman of little Valley Hospital in Ridgewood, N.J., a job he says offers "a front-row seat on how changes in the health-care system affect a 431-bed community hospital." Gilmartin's ties to Valley also reflect his roots in Ridgewood, the cozy upper-crust town where he and Gladys, his wife of 31 years, settled in 1976 and raised their three children.

Gilmartin still tools around town in an old Buick station wagon, though he recently treated himself to a new Jeep Cherokee. He is an occasional skier and has a summer home in Maine, where he owns a 28-foot sailboat with a friend because "it's hard to justify something out there at the mooring that you're not spending much time sailing." A regular at Ridgewood's 800-member St. Elizabeth's Episcopal Church, he frequently lingers at coffee hour. "You would have no idea that Ray is the head of a major corporation," says the rector, Reverend John G. Hartnett. "His is a genuine and deep humility." Nonetheless, Gilmartin does often critique his sermons, sometimes after bouncing the minister's ideas off his chauffeur. (Gilmartin, who disdains most trappings of office, says he agreed to be driven to and from work because it gives him time to catch up on his "homework.")

RADICAL. Perhaps the most radical aspect of Gilmartin's approach, for Merck, is his creation of "worldwide business strategy teams," each focused on a key disease. The teams bring together executives from areas as diverse as finance, manufacturing, and marketing to assess everything from drugs' production costs to market potential.

Take the 13-member osteoporosis team, led by Treasurer Caroline Dorsa. The group oversees worldwide doctor-education programs and advertising to show that Fosamax curbs fractures in afflicted women. The team is involved in efforts to win government approval of expanded claims for the drug. And it will track the progress of follow-on drugs. The aim is a "coordinated global strategy" to attack the disease, explains Dorsa, who says her team has "unfettered access to Ray and to his group."

As they delve into ills ranging from high cholesterol to prostate disease, the teams are supposed to help Gilmartin and his management committee make better research, manufacturing, and marketing decisions. Already, insiders say the teams are a big improvement over the days when responsibilities for developing, marketing, and tracking sales of drugs were compartmentalized. Had they existed earlier, they might have averted some missteps. If a team had worked on Proscar, for instance, it might have held out for two-year studies of the drug's efficacy after evidence from a yearlong review proved thin. Says Scolnick: "We would have ended up with a much stronger drug at launch." As it is, Merck has made Proscar a $465 million-a-year seller and plans to build on that with Propecia, a version that exploits a fortuitous side effect--promoting hair growth in balding men.

At every turn, Gilmartin pushes staffers to air problems and debate without regard for hierarchy--and without getting personal. "Where you want the contest is not among people but among ideas," he says. "It's very important for people to be able to challenge, to be very open." It was not only for symbolic reasons that he unlocked the doors to the executive suite at Whitehouse Station (N.J.) headquarters.

Giving top executives autonomy to lead their domains has helped Gilmartin win the loyalty of people often pursued by other companies. CFO Lewent, for example, is highly regarded for building a team than can handle most of Merck's mergers-and-acquisitions and joint-venture work. While insisting that "to be CFO at Merck is the highest honor I can think of," she says she's happy Gilmartin has asked her to oversee Merck's ventures with DuPont, Johnson & Johnson, and Astra. Scolnick says he doesn't regret being passed over for Gilmartin's job. "The company is far better off having him as CEO and me as head of research," he says. It doesn't hurt, he concedes, that nonscientist Gilmartin, unlike Vagelos, is "completely dependent" on Scolnick's judgments on lab matters. "He's delegated to me...and my responsibility is to make sure that I come through for him."

Not long after issuing its mission statement, Gilmartin's management committee laid out some ambitious financial goals that Merck has so far failed to reach. Merck will again become a "top-tier growth company," the plan says, performing among the top 25% of health-care companies. In 1995, however, net income and sales rose just 11%, to $3.3 billion in gains on $16.7 billion in sales, while rival Pfizer Inc.'s profits rose 22%, and J&J's 20%. For the first nine months of this year, Pfizer's earnings rose 23%, and J&J's 20.3%. But even though Merck's sales shot up 19%, net profits rose just 15%, slowed in part by spending to promote new drugs.

Even bullish analysts say Gilmartin will have to stretch to hit the goals. As Merck gets bigger, growth is bound to slow, says NatWest Securities Corp.'s Jack Lamberton. After this year's likely 16% earnings increase on an 18.6% sales rise, he expects net income to grow just under 15% in each of the next two years. He thinks sales gains could slip back into single digits after 2000.

Confronted with such predictions, Gilmartin turns cool and terse. Anyone forecasting declining growth is underestimating the prospects for Merck's new drugs, he contends. The bone-building Fosamax, for example, is expected to rack up more than $200 million in sales this year, and analysts conservatively estimate that it could top $800 million a year in 1999. Moreover, several promising medicines in the pipeline--an asthma remedy, a migraine drug, and two arthritis treatments--could go far to replace sales that will be lost when a few megasellers go off-patent after 2000.

To keep growth rates up, Merck must push its sales efforts into overdrive. Under Vagelos, Merck for years disdained wheeling and dealing, sticking with single prices for all buyers. Gilmartin, by contrast, wines and dines customers and is comfortable and flexible with them.

PEACEMAKER. It was during his 18 years at Becton Dickinson, especially his five years as CEO, that Gilmartin learned how to meet the needs of cost-conscious managed-care buyers. In a tightfisted environment, Becton's sales rose 44% between 1988 and 1993, to $2.5 billion. Before jumping to Merck, Gilmartin had long been scheduled to meet with top executives of Premier Inc., a Chicago-based 1,800-hospital buying group. The meeting took place on what turned out to be his first evening as Merck's CEO, and he turned it into a peacemaking session between Merck and Premier, which had been unable to agree on discount terms for bulk purchases. Since then, the two have set up a five-year deal that gives Merck's drugs an edge over rivals' and provides cost breaks of up to $20 million a year for Premier hospitals.

One of Gilmartin's biggest challenges is making the $6.6 billion purchase of Medco pay off. Medco, which brokers purchases of Merck's and other makers' drugs for big benefit-plan buyers, accounts for more than one-third of total revenues. It currently sells more than $1 billion a year of Merck drugs alone. But Alex. Brown analyst Barbara A. Ryan figures Medco's 1996 profits may be as little as $700 million before taxes. Meanwhile, Princeton University health-care economist Uwe E. Reinhardt says Medco must earn $900 million annually after taxes for 15 years for Merck to begin earning a return on its $6.6 billion.

Gilmartin insists that buying Medco was a smart move and that profits alone don't tell the story. Over time, he says, Medco will continue to boost Merck's market share and better equip it to sell drugs to a world dominated by managed-care buyers. At best, however, it will be late in Gilmartin's tenure before he can say Medco has proved its worth.

Gilmartin's critics, including some former Merck staffers, say his changes don't go deep enough. One former top manager thinks he should do away with the secluded executive suite altogether. More important, some defectors call Gilmartin's efforts mere tinkering next to Vagelos' bold strokes, which included visionary research choices and pioneering joint ventures as well as the purchase of Medco. Clateo Castellini, who worked for Gilmartin at Becton Dickinson and succeeded him there as CEO, endorses the view of Gilmartin as highly cautious. Gilmartin, he observes, "didn't make his career by advising . . . aggressive, revolutionary steps."

Gilmartin isn't apologizing. "Based on the prospects we have, I don't see the need for bold strokes," he says. If Merck hews to its task of developing and marketing novel medicines, he maintains, it will thrive. "The vision of this company was established decades ago, and its underlying philosophies were extremely successful," Gilmartin says. "They will work every bit as well in the future as they did in the past." Consensus-builder Gilmartin may like to encourage open debate. But with Merck churning out important new medicines and racking up consistent gains, he isn't hearing much argument just now.By Joseph Weber in Whitehouse Station, N.J.Return to top

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