Merck: Who Will Revive The Giant?

Earnings and new-drug disappointments have investors worried about succession

To hear Merck & Co. (MRK ) Chief Raymond V. Gilmartin tell it, the selection of the drugmaker's next chief executive will be a model of succession planning. Gilmartin, who will retire in 2006, has said Merck has an abundance of strong internal candidates.

Few on Wall Street, however, share his confidence. As the once-dominant Merck suffers through patent expirations, earnings slips, and a dearth of new products, pressure is building on its board to find an outsider to revive the $24 billion pharmaceutical giant. Analysts and executive recruiters say the board has little choice but to consider well-regarded industry veterans such as Schering-Plough (SGP ) CEO Fred Hassan, former Warner-Lambert chief Lodewijk J.R. de Vink, who is now at the investment firm Blackstone Group, or retired Johnson & Johnson President James T. Lenehan.

At Merck, succession is handled by a committee led by retired Honeywell Chairman Lawrence A. Bossidy. But with the company and the board unwilling to comment, it's not clear how they plan to proceed. Investors are anxious after four products failed in development last year. In August, studies raised questions about the prospects for Merck's cholesterol-fighter Zocor and its painkiller Vioxx. In two years: the loss of U.S. patent protection for $5 billion Zocor. At $45, shares now trade at half their 2000 peak.


While many in the industry face similar research-and-development droughts, rivals have been more aggressive about acquiring companies or licensing products to fill the gap. At the same time, Merck focused on traditional drugs instead of pushing into biotech products. For the next CEO, the stakes couldn't be higher. Says Lloyd S. Kurtz, portfolio manager at Nelson Capital Management: "Merck either reclaims its leadership in the industry, or becomes a has-been."

The best-known internal contender for the job is longtime CFO Judy C. Lewent. The 55-year-old Lewent helped forge several partnerships starting in the 1980s, including one that gave Merck a big chunk of sales from the anti-ulcer drug Prilosec, once the world's best-selling drug. In 2003, Lewent took over Merck's Asian operations. Still, she enjoys scant credibility among investors who have been disappointed repeatedly, including in 2003 when Merck failed to deliver the double-digit earnings growth it had promised.

Instead, current and former Merck execs are betting on an unknown. Bradley T. Sheares, 47, a onetime cancer researcher who joined Merck in 1987, now is co-head of its U.S. drug business. But he has little global experience and no record of steering corporate strategy. A long shot: Peter S. Kim, 46, who joined Merck in 2001. He has shaken up Merck's R&D unit, but has little business experience.

If Merck has to scramble to bring in an outsider, it will mark the second time the board has been caught unprepared. It recruited Gil-martin from medical supplier Becton-Dickinson in 1994. Possible contenders include Lenehan, 55, a proven manager of large-scale operations at J&J, and de Vink, 59, Warner-Lambert's chief during its heyday in the late 1990s. But the most obvious candidate is Schering-Plough's Hassan, 58. Merck and Schering have a joint venture to market the cholesterol drug Vytorin. If Merck acquires Schering, it would allow Merck to gain complete control of Vytorin's potential blockbuster revenues -- and pave the way for Hassan to succeed Gilmartin. With Gilmartin opposed, an acquisition seems unlikely. All three executives declined to comment.

At a minimum many investors expect the board to examine all options by conducting an external search while it considers the internal candidates. For weary Merck shareholders, a shot of fresh blood may be the perfect medicine.

By Amy Barrett in Philadelphia, with Michael Arndt in Chicago

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