Richard Clark was flustered and unprepared when he was thrust into the CEO job at Merck & Co. (MRK ) on May 5, 2005. It was the darkest hour in the pharmaceutical giant's 114-year history. Merck was drowning in liability suits stemming from Vioxx, its $2.5 billion-a-year arthritis drug, which it had to pull from the market because of a link to heart attacks and strokes. Two other blockbusters worth a combined $7 billion in annual sales were facing patent expirations. And Merck's labs, which other companies once hailed as a bastion of scientific innovation, were crippled by a culture that buried good ideas under layers of bureaucracy. But in the morass, Clark saw opportunity. "A crisis is a terrible thing to waste," says the CEO.
The 35-year Merck veteran says he had "no clue" what his turnaround plan would be. What he did know: Getting back on track would take much more than a cosmetic restructuring or slash-and-burn layoffs. Clark had watched the company degenerate into a collection of fiefdoms more focused on advancing their own agendas than on getting the right drugs to patients. To revitalize drug development he'd need to get Merck's 60,000 employees--scientists, regulatory staff, and salespeople--to work together.
Clark set out to blast open deeply blocked channels of communication. Over the years, Merck had fallen out of touch with customers. Clark wanted to get employees to stop thinking about their specific job functions and to instead focus on the diseases they were trying to conquer. So he began placing people in teams defined by therapeutic fields such as cancer and diabetes. He encouraged the teams to huddle with doctors who prescribe Merck's products, patients who take them, and even insurers that decide whether or not to pay for them. "It's a different way of doing business," says Clark, 61.
In essence, Clark turned Merck's drug development on its head. While he can't take credit for drugs that Merck discovered years ago, his disease-focused approach has pushed some products through Merck's pipeline at speeds that caught rivals by surprise. Januvia, a first-of-its-kind diabetes drug, hit the market in October, 2006, and HIV drug Isentress is on track to be approved by the Food & Drug Administration this October.
It will be years before it becomes clear whether Clark's changes will produce a reliable stream of blockbuster drugs. Still, Wall Street has hope that there's a solid growth story at Merck, despite the Vioxx debacle. The company's stock has jumped 17% since January, outpacing the American Stock Exchange Pharmaceutical Index, which is up 4%. Analysts expect Merck's top line to grow 4%, to $23.5 billion this year, an achievement considering that sales growth had flatlined even before Vioxx imploded.
Virtually no one expected this from Clark. The low-key executive was promoted to CEO from a very unglamorous post at Merck: head of manufacturing. While Clark was well-known inside the company as a stickler for efficiency, outsiders feared he lacked the vision to restore Merck to its scientific glory days. "At the time we said: 'Who is he?," recalls Morgan Stanley (MS ) analyst Jami Rubin. The yawns grew wider when Clark announced plans to cut costs ($4 billion by 2009), a typical opening gambit by CEOs without grand plans. Then good news started flowing from Merck's labs, and Wall Street began to see that maybe something different was unfolding. "What's impressive is the speed with which he has galvanized an organization that was so depressed," Rubin says.
Uncertainty over the outcome of the Vioxx litigation casts a shadow over Clark's early progress, however. The company's strategy of fighting each suit separately is working so far: 10 out of 15 verdicts have gone its way. But Merck is still facing 27,250 Vioxx claims, and information expected to be released over coming weeks could bolster plaintiffs' claims against the company. Meanwhile, Vioxx has become a lightning rod in Congress, which has spent much of the summer debating tough new drug-safety legislation. Clark maintains Merck did nothing wrong in its handling of the product. Yet he acknowledges the sudden loss of the drug highlighted the company's need to find a more efficient way to fill its pipeline. "It really helped accelerate the change," he says.
Clark's struggle is emblematic of the difficult task facing all pharmaceutical CEOs. More than 70 big drugs will lose their patent protection by 2011, causing a collective loss of $100 billion in annual sales. The mapping of the human genome and advances that make it faster and easier to screen potential drug candidates should be lighting a fire under drug development, but they haven't so far. So pharmaceutical companies are grappling with new models. Pfizer Inc. (PFE ) is trying to become more inventive by looking outside and partnering with small biotechs. Johnson & Johnson (JNJ )--which has long maintained that the key to innovation is to preserve the independence of the companies it has acquired--has reconfigured its drug development operations into three business units, so it can be more tightly focused. "We're all being challenged to rethink this," says Samuel O. Thier, a professor at Harvard Medical School and Merck board member.
Despite the high-tech gloss on the pharmaceutical industry, most drug companies are still organized around an old industrial model. Typically a new product starts in research and is handed to manufacturing. Then sales comes up with a marketing plan. Finally the drug gets passed down to regional managers around the world, who develop their own sales strategies. This hand-off model can lead to mistakes: Scientists might put years and millions of dollars into a drug, for example, only to find out that the audience is not as big as they imagined it to be. Worse, managers might not devote the necessary resources to the most promising ideas, because they're blinded by the need to maximize their own units' profitability. Bringing disparate voices together from Day One "is the way work should get done in companies," says Clark, drawing grids on a legal pad to make his point. "It's not up and down. You need people to work together."
One group of Merck employees was already experimenting with a disease-focused model before Clark became chief executive. They had come together to develop a diabetes drug that ultimately failed. But after hearing Clark talk about busting up the traditional approach to drug development, the team volunteered to pilot his new plan with Januvia, which was just about to go into pivotal clinical trials. They knew they had a potential blockbuster on their hands, because the drug offers a completely new way to attack diabetes. But rival Novartis (NVS ) was way ahead of Merck in testing a similar drug called Galvus.
In the past, Merck's science types might have spent years testing Januvia in combination with every other diabetes therapy patients might be taking so that the FDA would allow the drug to be pitched to the broadest possible audience. With advice from marketing colleagues, who were in tune with what diabetes patients and doctors were demanding, the diabetes group devised a faster path to victory: They decided that initially they would only test Januvia with the two most widely used diabetes drugs and as a solo therapy. "We didn't do studies that were nice to have," says Jay Galeota, general manager of the diabetes and obesity franchise. "We did studies that really represented where the product was most likely to be used."
Gathering input from customers such as doctors earlier in the process paid off in other ways. As Januvia moved along, reports emerged that Novartis' Galvus was causing some monkeys in the trials to suffer skin lesions. Conversations with doctors convinced Merck's diabetes team to design an extra monkey study to prove to the FDA that its drug was safe. The result: The agency approved Januvia without requiring a warning about the side effect. What's more, because there were manufacturing and marketing folks on the diabetes team, constantly trading information about the approval time line and customer demand, Merck had Januvia on pharmacy shelves four days after the FDA gave it the green light. At the old Merck, it would have taken as long as a month to launch the product. Morgan's Rubin reckons Januvia and a related product will bring in $762 million in sales this year. Meanwhile, Galvus is still awaiting FDA approval.
Getting better products out, faster, is crucial, but paying attention to your biggest customer base--the insurance companies--is also important. Clark should know. He served as chief operating officer and then CEO of Merck's pharmacy benefit subsidiary, Medco, from 1997 to 2002, before it was spun out as an independent company. The experience drove home to him the immense power that insurance companies wield when they decide whether a new drug is worth paying for or whether it's not much different from older, cheaper alternatives.
Merck has always talked to insurers just before drugs hit the market, but Clark believes the discussion needs to start much earlier, when a new therapy is just an inkling in a scientist's brain. That way, Merck can be sure it is designing trials that directly answer payers' questions about safety and efficacy, especially in relation to what the comparative expense of a drug might be. "The value proposition has to be from the payer's perspective," Clark says. "If you don't listen to your customers you're going to wake up someday and not have them."
Mixing scientists with insurance executives is a little extreme. With the cost of drugs growing at double digits every year, payers come to the table with a built-in bias against new products, if not a little hostility. Yet Merck research and development chief Peter S. Kim has embraced the idea. Last September, for example, 200 Merck scientists went on a retreat. Along for the ride: a patient who suffers from rheumatoid arthritis and a top executive from insurer Aetna Inc. (AET )
The patient described her travails with steroids, which treat her disease effectively but also touch off side effects such as bloating. Merck is working on nonsteroid treatments with minimal side effects. Aetna suggested Merck look for clues to predict which patients respond best to which therapies. Tailoring the drug to the right audience would not only result in better outcomes for patients but also save insurers money in the long run. "As we figure out how to reinvent ourselves, understanding different perspectives is going to be a critical piece of the puzzle," says Kim, who joined Merck in 2001 from Massachusetts Institute of Technology.
If fraternizing with insurance executives sounds bizarre, consider this: Merck is rewarding scientists for failure. One of the hardest decisions any scientist has to make is when to abandon an experimental drug that's not working. An inability to admit failure leads to inefficiencies. A scientist may spend months and tens of thousands of dollars studying a compound, hoping for a result he or she knows likely won't come, rather than pitching in on a project with a better chance of turning into a viable drug. So Kim is promising stock options to scientists who bail out on losing projects. It's not the loss per se that's being rewarded but the decision to accept failure and move on. "You can't change the truth. You can only delay how long it takes to find it out," Kim says. "If you're a good scientist, you want to spend your time and the company's money on something that's going to lead to success."
Management consultants say rewarding misses as well as hits is the right idea, and one that the entire industry will need to adopt. "The earlier you determine when something should be killed, the better," says Charlie Beaver, vice-president at consultant Booz Allen Hamilton Inc. Still, he warns, changing a corporate culture from one that thrives on success to one that also accepts failure "is a very large hurdle to overcome."
While Clark is encouraged by the results of his changes so far, he's still haunted by the culture of complacency that left companies like his stuck in an innovation rut. "If you ever feel comfortable that your model is the right model, you end up where the industry is today," he says. "It's always going to be continuous improvement. We will never declare victory."
By Arlene Weintraub