A Week Of Woes Raises More Questions About Saint Merck

To some on Wall Street the company is affectionately called "Saint Merck." For seven years running, Merck & Co. has been rated "America's Most Admired Corporation" by Fortune magazine, Sales have tripled since 1983, as a seemingly endless parade of new prescription drugs flowed from the company's labs. Last December, when chairman P. Roy Vagelos named 42-year-old marketing genius Richard Markham as the company's president and his heir apparent, Merck's future seemed as secure as any in the industry.

Then came the summer of '93. On July 9 Merck abruptly announced that Markham was leaving for "personal reasons." Last week it said that second-quarter earnings plummeted 73 percent, due in part to a $775 million write-off to cover the early retirement of 2,100 workers. The company's latest big-name product, a prostate drug called Proscar, hasn't made the hit parade, and the upper end of its research-and-development pipeline is looking a little dry. As its stock hit a 12-month low, America's most-admired company had clearly lost its luster. Says Bill Newbury of the College Retirement Equities Fund, one of Merck's largest investors: "This is the toughest time that Merck has had in 10 years."

Markham's sudden departure is still shrouded in mystery. "Neither I nor anyone else on Wall Street has a clue why Dick Markham left," says PaineWebber analyst Ron Nordmann. Both Markham and Vagelos have refused to comment, fueling rumors that Markham was pushed out after pressing too forcefully for reforms. He was a "rising star with progressive ideas," says Larry Feinberg, who heads the healthcare-investment firm Oracle Investors. "My guess is that the stodgy old guard that's been guarding the candy store wasn't ready for him." But the company denies that there was discord. "That simply is not the truth," says Merck spokesman John Doorley. "Dick Markham and Dr. Vagelos got along very well and from a business standpoint they saw eye to eye."

Undeniably, however, Markham's brief tenure as president saw aggressive new moves to extend Merck's customer base. The company slashed prices on some products and expanded its generic-drug unit in an attempt to fend off low-cost competitors. The boldest move was Merck's surprising courtship of Medco Containment, the nation's largest mail-order-drug company. Industry insiders speculate that Markham and Vagelos may have locked horns over that deal, but there were rumors last week that Medco and Merck were still talking about some kind of strategic alliance, possibly to be announced as early as this week.

The turmoil at Merck's flashy new head-quarters in New Jersey horse country couldn't have come at a worse time. The uncertainty of national health-care reform hangs over the entire pharmaceutical industry. Merck's traditional markets are changing dramatically, too. The days when private physicians blindly prescribe whatever new wonders the drug makers invent are drawing to a close; now managed-care providers, such as health-maintenance organizations, specify which drugs doctors may prescribe--and drive hard bargains over the cost. All drug companies are suffering under this new paradigm, but because Merck was the best at doing things the old way, it now has the biggest adjustment to make. Until recently it haughtily refused to give price breaks to managed-care providers, and some critics contend it still hasn't figured out how to deal with them. "When you're the king of the hill, you have a longer way to fall," says Barbara Ryan, an analyst with Alex. Brown & Sons.

Merck's problems have been complicated by sagging sales of some of its top drugs. While its heart drug Vasotec is still a $2 billion performer and its ulcer remedies are doing well, sales of cholesterol-lowering Mevacor have slumped. But the greatest disappointment has been Proscar, which was unveiled with much fanfare only last year. "When Proscar came out, it generated all kinds of laudatory articles in the business press," says one source. "Then Proscar went pfft." The problem, it seems, is that urologists would rather do surgery than prescribe a drug that might cut into their business.

Despite the setbacks, Merck remains among the world's healthiest pharmaceutical companies. Its willingness to cut the work force while profits were still strong draws plaudits on Wall Street; even investors who now treat drug stocks like the plague consider Merck to be at the top of its class. What is not clear is who will inherit the task of restoring its luster. Merck says that Vagelos, 64, still plans to step down next year, and at least four top executives are in the running to succeed him. Whoever takes the job may well cut even more jobs, particularly in the 2,500-person U.S. sales force. If costs come down and the drug pipeline fills up, Wall Street is poised to welcome back a company it has loved for years. Meanwhile, though, Saint Merck is no longer the sacred investment that it used to be.