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Dear Shareholders:
As they have for decades, the people of Merck continued their work in 2002 with an extraordinary sense of purpose–to discover and develop the best of medicines and to bring those medicines to people everywhere. George W. Merck, the Company’s modern-day founder, first articulated this purpose in a speech at the Medical College of Virginia in 1950. His words remain our guideposts today.
George Merck’s vision is embodied in five core principles that reflect who we are and what we do. First, we discover and develop novel medicines that are true advances in patient care. Second, we demonstrate advances in patient care through outcomes studies. Third, we pursue programs, policies and partnerships that broaden access to our medicines. Fourth, we conduct our business with the highest standards of ethics and integrity. And finally, we develop strong, principled leaders who focus not only on results, but on how those results are achieved. You can read more about our principles throughout this report.
These principles are benchmarks of Merck’s commitment to deliver value to shareholders and customers, and they guide our people in their work to discover, develop, manufacture and market the best of medicines.
Striking a balance
In the final phase of our current patent expiration period, Merck maintained its firm commitment to continue making substantial investments in research and development. Merck invested $2.7 billion in research in 2002, a 9 percent increase over the previous year. While continuing to invest in the marketing of key products, we also recognized savings through operational efficiencies and work redesign initiatives in all parts of our business. This strategy was a balance during a challenging year. As anticipated, our earnings per share for 2002 were consistent with 2001 earnings.
In 2002, our major in-line franchises continued to perform well: the cholesterol-modifying medicine Zocor; the arthritis and pain medicine Vioxx; Fosamax, for postmenopausal osteoporosis; Cozaar/Hyzaar, for high blood pressure; and Singulair, for asthma. Each ranks Number 1 or Number 2 in worldwide sales in its class, because each represents a true advance in patient care with proven clinical outcomes. Together, sales of these medicines grew by 14 percent in 2002.
Merck’s new coxib, Arcoxia, was launched in 19 countries in 2002, including several in Europe, Latin America and the Asia-Pacific region. Arcoxia has been studied in a broad range of indications, including osteoarthritis, adult rheumatoid arthritis, chronic pain, acute pain, dysmenorrhea (menstrual pain) and acute gouty arthritis.
In October 2002, the U.S. Food and Drug Administration (FDA) approved Zetia, a medicine developed jointly with Schering-Plough Corporation that represents the first new approach to lowering cholesterol in 15 years. Singulair received FDA approval in late December for use in treating seasonal allergy symptoms in adults and children as young as two years of age. Most currently available oral allergy medications work by blocking histamine, one of several causes of allergy symptoms. Singulair provides a new and different way to treat seasonal allergies by blocking leukotrienes instead of blocking histamine. A convenient, once-a-day tablet, Singulair helps relieve a broad range of seasonal allergy symptoms for 24 hours.
We also announced our intention to separate our pharmacy benefit management unit, Medco Health Solutions, Inc. from Merck. Market conditions led to our postponement of those plans during the year. Meanwhile, Medco Health Solutions continued to deliver strong sales growth in 2002. Net revenues, reported on a stand-alone basis, reached $33 billion, a 13 percent increase over 2001. Merck remains fully committed to establishing Medco Health Solutions as a separate, publicly traded company, and intends to complete the separation in mid-2003, subject to market conditions.
In 2002, Merck’s focus on its core principles helped the Company withstand the pressures of a challenging environment, and positioned us to resume growth in 2003. We believe these principles and our strong sense of purpose also will help us successfully address the market, scientific and political/regulatory forces now shaping the future of our industry.
Addressing market forces
Spending on medicines is increasing at a rate of 15 to 20 percent annually in the United States. At every level, corporations and governments are seeking to control costs of health plans and deliver greater value.
We believe the way to succeed in this environment is to turn cutting-edge science into novel medicines that are true advances in patient care–with proven clinical outcomes. This will help us accelerate growth and increase market potential, strengthen our competitive advantage and help our medicines achieve favorable formulary positions. In today’s highly competitive environment, managed care organizations in the United States and governments throughout the world consider value and clinical benefit when they engage in price negotiations. And we deliver on both accounts.
Through outcomes studies, Merck’s medicines continue to demonstrate clear and consistent clinical benefits to patients, physicians and payors. For example, Vioxx has achieved exclusive formulary status covering an additional 15 million lives since the data from the Vioxx Gastrointestinal Outcomes Research (VIGOR) study were added to its label.
Merck is seeking a new indication for Cozaar based on data from the Losartan Intervention for Endpoint Reduction in Hypertension (LIFE) study, which demonstrated a significant reduction in the risk of stroke in hypertensive patients with left ventricular hypertrophy (LVH), a thickening of the heart’s main pumping chamber. Results from the Heart Protection Study (HPS), the largest-ever study using a cholesterol-modifying medicine, showed that Zocor 40 mg saved lives by reducing the risk of heart attack and stroke in a broad range of high-risk patients. Merck is seeking to incorporate data from HPS into the prescribing information for Zocor.
Delivering true advances in patient care at a competitive price mandates a cost structure that allows Merck to price competitively while protecting profitability. Manufacturing productivity and quality continue to be a major focus, and we look to find ways to improve productivity throughout our business. Through our Operational Excellence programs, we are implementing initiatives to improve the efficiency and effectiveness of our work processes.
Turning new scientific information into novel medicines
Excellence and clinical benefit begin in Merck’s laboratories. Our work here is shaped by the second category of forces changing our environment: science. Merck is engaged in areas where there is exciting new knowledge of the pathways of disease. Our goal is to discover medicines that are novel and represent genuine advances in patient care.
Following that strategy requires Merck to be on the leading edge of science. Three initiatives will help keep us there.
First, we continue to attract the very best people. Merck recruits key talent like Peter S. Kim, Ph.D., our new president of the Merck Research Laboratories, who joined Merck because of our 70-year tradition of scientific excellence, the world-class scientists in our laboratories, and our commitment to working on the leading edge.
Second, we locate research facilities where some of the best science is being done. Merck is building a major new research center in the heart of Boston’s biomedical community. Our acquisition of Sibia Neurosciences gives us an excellent research facility strategically located near a center of neuroscience at the University of California at San Diego. Our purchase of Rosetta Inpharmatics gives us access to industry-leading genomics tools and talent emerging from the technology-rich state of Washington.
Third, we reach out and participate in scientific research through external alliances. In 2000, we redefined our licensing and business development program to give our scientists access to the best science, wherever it is found. As a result, our outside relationships have grown significantly. This move added a new chapter to our long history of external alliances. Two of our leading in-line products, Fosamax and Cozaar, are the result of external relationships, and now, Zetia has emerged from a partnership with Schering-Plough.
It is not enough to seek out, discover and develop novel medicines. As George Merck said, we must ensure that those medicines reach the people who need them most. That is where the political and regulatory environment comes in to play.
Improving access to our medicines
Access and affordability are key issues of our time. In the United States, these issues are reflected in the debate on how best to provide medicines for the uninsured and how to add prescription drug coverage to Medicare. Internationally, the focus is on making medicines available in countries that are experiencing health crises because of epidemics such as HIV/AIDS, tuberculosis and malaria.
Merck’s approach to these issues is straight-forward: If we serve the public’s interest, Merck’s interests also will be served.
In the national debate over Medicare, we have articulated support for a plan that allows seniors to choose their coverage from qualified, private health plans that rely on market competition rather than government price controls. This approach is consistent with the plan that members of Congress designed for themselves, their families and all federal employees.
We are optimistic that legislation can be passed in 2003 that will benefit seniors and companies such as Merck, whose principles are based on delivering breakthrough medicines that demonstrate value.
Internationally, Merck’s partnership with the Government of Botswana and the Bill & Melinda Gates Foundation continues to confront the crisis of HIV/AIDS, with a comprehensive program of prevention, care, treatment and support called the African Comprehensive HIV/AIDS Partnerships. The Merck Company Foundation is matching the Gates Foundation’s $50 million commitment to this program, and we’re donating medicines as well. We are also offering our HIV/AIDS medicines at no profit in the poorest countries throughout the world and those hardest hit by the epidemic.
In October, Merck celebrated the 15th anniversary of its Mectizan Donation Program. I had the honor of being in Tanzania to deliver the 250 millionth free dose of Mectizan, our medicine that is helping to eliminate river blindness in developing countries. The Mectizan Donation Program is a model for other similar public/private partnerships, and many of the lessons learned from this program are being applied in Botswana. As we move forward, developing partnerships will remain a strong priority. Our experiences with Mectizan and in Botswana demonstrate that through collaborations, we can bring expertise and resources to the countries that need them most.
Moving forward
As we move into 2003, our growth will be fueled by the momentum of our large in-line franchises, and the recent launches of Singulair (for seasonal allergy symptoms) and Zetia. In addition, we are broadening our portfolio of medicines by expanding our current franchises and moving into new therapeutic areas.
Emend, for the treatment of chemotherapy-induced nausea and vomiting, is currently under review by the FDA and other regulatory agencies. Merck anticipates refiling an expanded New Drug Application (NDA) in the United States for Arcoxia in the second half of 2003. Merck also anticipates filing an NDA for combination tablets for Zetia/Zocor in late 2003.
Our late-stage pipeline also includes MK-767, a diabetes compound licensed from Kyorin, and aprepitant for depression. In addition, three vaccines are under development targeting: human papillomavirus infection, which can lead to the development of cervical cancer; rotavirus, for prevention of infant diarrhea and dehydration; and herpes zoster, a painful condition commonly known as shingles. Our earlier-stage pipeline includes innovative approaches in HIV and programs in new therapeutic areas such as obesity and respiratory disease.
Merck will continue to increase its investments in research in 2003. We expect that research and development spending will grow 10 to 12 percent over 2002. This investment will support our late-stage pipeline as well as a promising future pipeline that reflects one of the Company’s most productive periods ever in basic research.
In 2003, Merck expects to purchase up to the remaining 49 percent of the common shares of Banyu Pharmaceutical Co., Ltd. that it does not already own. The successful completion of this tender offer will allow Banyu to further enhance and consolidate its position in the Japanese market, the world’s second largest pharmaceutical market, while simultaneously strengthening Merck’s position worldwide.
Going forward, our model for generating growth and creating shareholder value over the long term is sound. Merck’s long-term financial goal is top-tier growth in earnings per share and we expect to return to double-digit earnings-per-share growth in our core pharmaceutical business in 2003. We have an exceptionally strong balance sheet and cash flow to fully support our growth strategy and provide returns to our shareholders in the form of dividends and stock buybacks.
In short, we pledge to remain true to our core principles of turning cutting-edge science into novel medicines that are true advances in patient care. And we are committed to doing so in an efficient, responsible and ethical way. This commitment starts with our Board of Directors, which executes its corporate governance responsibilities by focusing on the Company’s strategic and operational excellence and on the best interests of our shareholders. And it is practiced by our employees who focus not only on results, but also on how those results are achieved.
Our employees represent the true spirit of Merck–they are talented and committed leaders who collectively approach issues from multiple points of view. In our work, we must understand everything from gene arrays and chemical compounds to social structures, spiritual beliefs and changing systems of government. With their diverse backgrounds and differing life experiences, our employees bring a wide array of knowledge and perspectives to the workforce.
This is evident in the strength and breadth of Merck’s Management Committee, the team that develops and implements the Company’s strategic direction. Several experienced individuals assumed new leadership positions in 2002 when they were named to succeed key executives who retired or moved into new positions. The continuity of our leadership team is testimony to the talents and abilities of people throughout Merck. You can read more about the changes on the inside back cover of this report [see Management].
In the long run, we believe that our strategy will help us deliver the maximum benefit for patients, create the greatest value for our shareholders, and maintain an ethical work environment for our employees.
George W. Merck envisioned a Company that would be among the nation’s leading research institutions and deliver some of the world’s greatest breakthroughs in science and medicine. That vision is reality, and the principles that guided this Company in the past remain firmly in place today.
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Raymond V. Gilmartin
Chairman, President and Chief Executive Officer
March 1, 2003
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