A Promising but Perilous Rx

Can Germany's Merck succeed with cancer drugs?

The Germans call it Gründlichkeit -- a fanatical attention to detail. It's why they make such reliable cars and machine tools. It also helps explain why Germany's Merck, no relation to the U.S. drugmaker of the same name, is on track to do what ImClone Systems Inc. and Bristol-Myers Squibb Co. couldn't: win regulatory approval for the anticancer drug Erbitux.

That's the infamous drug that sparked an insider-trading scandal and disturbed the order in Martha Stewart's kitchen. ImClone's clinical studies of the compound were rejected by the U.S. Food & Drug Administration in 2001, which cited incomplete data and the lack of a control group. But Merck, based in Darmstadt, south of Frankfurt, was more rigorous in running its own trials, which included a much larger sample of patients. On June 1, at an oncology conference in Chicago, Merck presented a study showing that Erbitux can prolong the lives of some patients with advanced colon cancer. A separate trial has shown that the drug is also effective in treating lung cancer.

The closely watched studies may even help ImClone and Bristol-Myers win approval for Erbitux in the U.S. "It wasn't a product problem, it was a management problem," says Ulrich Huwald, an analyst at M.M. Warburg in Hamburg. "Merck did a better job." Now, the German company is on track to start selling Erbitux in Switzerland before the end of the year and in the rest of Europe the next.

That's a relief for Merck CEO Bernhard Scheuble, who has charted a risky course for the family-controlled company. Until now, Merck's pharma business has revolved around Glucophage, a diabetes drug that accounts for nearly a quarter of the company's prescription-drug sales, excluding generics. But the company's exclusive rights to sell Glucophage in the U.S. expired last year. With profits of $252 million in 2002 on sales of $8.7 billion, Merck will struggle to be profitable this year. The weaker dollar is reducing the value of its U.S. sales, while an ongoing restructuring program could cost $200 million or more.

To recoup lost revenue, Scheuble is betting big on cancer drugs. Merck is testing a breast cancer vaccine called Theratope, which it licensed from Canada's Biomira. It also is conducting early-stage trials for EMD 72000, a compound developed in-house for use against cervical, gastric, and ovarian tumors. Like Erbitux, EMD 72000 belongs to a breakthrough category of gene-based drugs that narrowly target cancer cells -- a far cry from slash-and-burn treatments like chemotherapy.

It's a promising but perilous strategy. If its cancer drugs disappoint, Merck could go the way of many of its former compatriots in the German pharmaceutical industry. Once known as the pharmacy to the world, German drugmakers were long ago eclipsed by competitors in Switzerland, Britain, and the U.S., where conditions for scientific research are more hospitable. Scheuble is determined to avoid that fate. He is devoting most of his $700 million research and development budget to cancer, going as far as to cancel work on three diabetes drugs that could have brought in $3 billion a year, according to analysts.

Scheuble's bet isn't a sure one. Erbitux' sales potential has been crimped by the delays caused by the ImClone flap. When the FDA rejected ImClone's trials, Merck had to start its own -- a process that consumed millions of dollars and delayed introduction of the drug by at least a year. "Did that hurt? Maybe," Scheuble concedes. But, he adds, "there is sufficient market potential." Merck expects Erbitux to generate $585 million a year in sales at the outset.

Even if Merck's cancer medicines don't live up to their promise, the 335-year-old company isn't likely to go under. Merck has a generic-drug business, and 42% of operating profit comes from specialty chemicals: It is the world leader in liquid crystals for use in products such as PC monitors. Still, without a crop of new medicines to replace its dwindling portfolio of diabetes drugs, Merck's pharma business may shrivel. All the Gründlichkeit in Germany can't change that.

By Jack Ewing in Frankfurt

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