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How Merck Is Treating the Third World

By David Shook Patent expirations on five major drugs over the past three years have exacted a toll on giant drugmaker Merck (MRK). Earnings are expected to be flat in 2002 -- roughly $7 billion (or $3.13 a share) -- and some analysts think profits for the year may even decline.

A drop in earnings would be a first under the eight-year tenure of Merck Chief Executive Raymond Gilmartin. After leaving medical-devices maker Becton Dickinson in 1994, Gilmartin joined Merck and presided over a 300% runup in its stock price. With the drugmaker now in a slump, its stock has fallen from a high of $70 in October, 2001, to around $45.

On Oct. 8, I caught up with Gilmartin after a Merck press conference about the company's efforts to fight river blindness in Africa and Latin America. It's a parasitic disease transmitted to humans through the bite of the blackfly, commonly found along the riverbanks in some African countries. The parasite infiltrates, multiplies, and spreads throughout the body for as long as 15 years, causing acute skin rashes, terrible itching, and sometimes disfigurement or blindness.

Merck's Mectizan, which is taken in pill form just once a year, has been proven to prevent the disease. Former President Jimmy Carter, whose Carter Center is involved in several Third World humanitarian efforts, praised Merck for contributing millions of doses of a vital drug to fight the disease in developing countries. It's estimated that 100 million people are at risk without the drug. Here are edited excerpts from our conversation:

Q: Do you see many parallels between Merck's work in Africa with the river-blindess drug and the industry's challenges in delivering free or low-cost AIDS drugs to sub-Saharan Africa, where HIV/AIDS is a major health crisis?

A: Absolutely. Everything that we talked about in our panel discussion today [distributing drugs for river blindness] applies to HIV/AIDS. The question of a delivery system and distribution is the major priority in the HIV/AIDS crisis in Africa.

We have a partnership with The Bill & Melinda Gates Foundation and with the government of Botswana where we've put up $50 million and the foundation has put up $50 million to distribute antiretroviral drugs available at no cost in Botswana.

We're attacking HIV in that country in many ways, including education programs that explain how to prevent disease transmission, condom distribution, hospice care, community-based counseling, diagnostics, clinical labs, as well as training for nurses, lab technicians, and pharmacists. We're also opening AIDS treatment centers.

Q: Do you acknowledge that the drug industry still needs to make greater humanitarian strides toward fighting AIDS in Africa with the drugs that your company and others have developed -- even though most countries in the developing world cannot pay for the medicines?

A: I think the drug industry is taking action on pricing and by offering steep discounts. In Merck's case, in regions of the world with the lowest levels of human development or the worst AIDS problems, our company is pricing at levels at which we make no profit. But even at that level, it's not really affordable for people in those countries unless we have additional resources from the outside -- from the developed world.

So I think the drug companies have taken on a major initiative. Our company has the program with Botswana. Other drug companies have targeted programs that they're pursuing. But it remains a tremendous problem. Even with our river-blindness drug, which involves just the simple intervention of one dose a year, the effort required the formation of all these public and private partnerships, and it demonstrates that the drug industry by itself will not be able to deal with the HIV/AIDS issue alone.

It really requires a broad coalition, including the recent formation of the Global Fund for HIV/AIDS treatment and prevention, which I feel is off to a very good start.

Q: In the U.S., several state governments are pushing to lower prices on many of the industry's top-selling brand-name drugs, including Merck drugs. Yet they're big profit-makers. If this pressure continues, would that limit the scope of drug companies' humanitarian efforts in the developing world?

A: No. We're subject to price competition in our market-oriented system in the U.S. In Europe and Canada, there are price controls, so we contend with that. But those are our developed markets. Anything we do in the developing world is in addition to that -- over and above our business in the developed world.

Given the fact that we're a business based on high, fixed costs of discovering drugs and very little variable cost, the steep differential pricing for the developing world is something we can do. It maximizes the social benefit of our drug without limiting our ability to maximize the revenues behind the drug itself.

Q: Your company's remarkable earnings growth has come to a halt. You expect no earnings growth this year over 2001, and a few analysts now suggest your earnings may actually decline slightly this year. What can you do to revive the growth?

A: Well, we're not growing this year because we've got some major drugs that are right in the middle of patent expiration. But we'll start to show core growth as we get through this patent-expiration period. We're looking to resume growth next year, and we're about to start a whole cycle of new drug filings and drug launches.

Q: Merck has embraced genomics, especially with your purchase last year of Rosetta Inpharmatics for $620 million. When do you see genomics finally paying off -- 5 years, 10 years?

A: It's hard to pick a time frame, but we're already seeing the near-term benefit of genomics in the discovery process. Rosetta Inpharmatics is a good example of that. We're now able to sort out compounds that are more likely to be successful and get them through the early safety trials without problems. Shook covers biotechnology issues for BusinessWeek Online. Follow The Biotech Beat every week, only on BusinessWeek Online

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