Merck conducts its business based on guiding principles of scientific excellence, ethics and integrity, and, above all, putting patients first. These principles and values have allowed Merck to play a leading role in discovering and developing medicines and vaccines that preserve and improve human life. And they have shaped both the manner in which we have responded to the challenges of the past year as well as our ongoing efforts, on behalf of patients and shareholders alike, to position Merck for future success and growth. The decision we announced on September 30, 2004 to voluntarily withdraw Vioxx from the market reflects the depth and sincerity of Merck’s commitment to patients. I would like to share with you the reasoning behind our voluntary withdrawal of Vioxx and our vision for Merck's future.
At the outset, I will address a question that undoubtedly has been on the minds of many Merck investors. Can Merck withstand the loss of revenue associated with the voluntary withdrawal of Vioxx and continue with its strategy for long-term growth? Our answer is a clear "Yes." We say this because the only strategy that can deliver long-term growth is one that is characterized by putting patients first, which is what our actions regarding Vioxx are all about.
We can continue to execute our strategy because Merck remains a financially strong company, fully capable of making the investments necessary to drive future growth for our shareholders. Our late-stage pipeline and fundamental research capabilities, both internal and external, continue to strengthen. We continue to make significant progress on initiatives aimed at permanently reducing our cost structure by enhancing Merck’s productivity, efficiency and effectiveness. Our people remain focused on implementing our strategy to meet the challenges and opportunities offered by the revolution in biosciences and the demands of patients, providers and healthcare systems worldwide. And our current commitment to our shareholders–our dividend–remains secure.
When Merck made the decision to voluntarily withdraw Vioxx from the market, we believed that it would have been possible to continue to market Vioxx with labeling that would incorporate the data from the APPROVe study. We concluded, however, that based on the science available at that time, a voluntary withdrawal was the responsible course of action, given the availability of alternative therapies and the questions raised by the data. We are confident that a careful and complete examination of Merck’s conduct shows that we acted responsibly and in a manner consistent with Merck’s commitment to patient safety and our rigorous adherence to scientific investigation, openness and integrity.
However, since we withdrew Vioxx from the market, the science has continued to evolve and new data on some of those alternative therapies have become available. This new information suggests that there are cardiovascular risks associated with other members of the class of similar drugs, known as COX-2 inhibitors or coxibs, marketed in the United States.
At the same time, we do know that Vioxx offers unique benefits among coxibs marketed in the U.S. It remains the only coxib with proven risk reductions in gastrointestinal events vs. naproxen as demonstrated in the VIGOR study. Also, it was the only coxib not contraindicated in patients with sulfonamide allergies and, importantly, Vioxx was the only coxib indicated for juvenile rheumatoid arthritis.
We also know that response to pain medication is variable. What works well for one patient may not work at all for others. We have heard numerous reports from patients, including those with chronic, debilitating pain, that Vioxx was the only medicine that relieved their pain.
Recently an advisory committee of the U.S. Food and Drug Administration (FDA) met to evaluate and make recommendations concerning the use of nonsteroidal anti-inflammatory drugs, including the coxibs. The advisory committee concluded that the overall benefits of Vioxx outweigh its risks. We look forward to discussions with the FDA and other regulatory authorities about Vioxx.
We acted swiftly to respond to the voluntary withdrawal of Vioxx in ways that will strengthen our business going forward.
- We moved quickly to redeploy our sales force, to immediately capitalize on opportunities to grow our in-line products, as well as to support the anticipated launches of four new vaccines and muraglitazar, a first-in-class treatment for Type 2 diabetes that we will co-promote with Bristol-Myers Squibb. A New Drug Application was submitted to the FDA for filing in December 2004.
- We promptly re-balanced our supply chains to make maximum use of our flexible manufacturing plants to handle new products. That flexibility is expected to save us approximately $300 million in capital expenditures and will allow us to meet demand without the need to hire about 300 additional personnel.
Focusing on the Future
Having responded swiftly and effectively, we have turned our focus to the future. The situation we face is not business as usual, but at the same time, we also recognize that the long-term growth strategy we have been carrying out is still very much the right one, given the environment in which Merck–and the industry–will be operating in the years ahead. In light of the challenges we face, we are continuing to look for additional ways to implement that strategy to further enhance Merck’s growth.
The primary attribute of the environment in which we are and will continue to operate is simply stated: patients, physicians and payers will continue to demand ever greater value from the drugs we offer.
- Patients, who are increasingly informed about and engaged in their healthcare choices, want true clinical benefit from the medicines they take.
- Physicians, who are increasingly demanding clear, concise information that is relevant to their practice and respects the demands on their time, look to Merck, more than ever before, to provide high-quality clinical and scientific educational materials and programs.
- And payers, who are under growing pressure to contain costs, want the medicines we offer to provide true clinical benefit–and not offer just another “me too”–and they want them available at a competitive price.
This environment presents other business challenges as well. As we announced on January 28, 2005, the U.S. Court of Appeals for the Federal Circuit in Washington, D.C., has reversed the earlier decision of another court and found Merck’s patent claims for Fosamax Once Weekly to be invalid in a 2-1 decision. We disagree with the decision of the Court of Appeals and will request reconsideration by the court. Merck’s basic patent for Fosamax covers both once-weekly and once-daily administration. The earliest date for marketing any generic version of this drug in the U.S. is February 2008. Previously, Merck’s patent for once-weekly administration was set to expire in July 2018.
Added to these demands are the opportunities and challenges offered by the revolution in the biosciences and by the technological revolution that is transforming drug discovery and development.
Taken together, all of these factors have caused us to change the way we approach every aspect of our business, across the entire Company, without compromising the core values that have long distinguished Merck: patient safety; high ethical standards; scientific excellence.
While honoring our core values, we have re-examined everything we do here at Merck to find new and effective ways to improve our ability to discover and develop novel medicines that provide true clinical value to patients at competitive prices.
Merck's Management Committee, from left to right: Adel A.F. Mahmoud, M.D., Ph.D., 63, president, Merck Vaccines; (seated) Kenneth C. Frazier, 50, senior vice president and general counsel; Margaret G. McGlynn, 45, president, U.S. Human Health; Richard T. Clark, 59, president, Merck Manufacturing Division; (seated) Judy C. Lewent, 56, executive vice president, chief financial officer, and president, Human Health Asia; David W. Anstice, 56, president, Human Health; Marcia J. Avedon, Ph.D., 43, senior vice president, Human Resources; (seated) Raymond V. Gilmartin, 64, chairman, president and chief executive officer; Bradley T. Sheares, Ph.D., 48, president, U.S. Human Health; Per Wold-Olsen, 57, president, Human Health-Europe, Middle East and Africa; Peter S. Kim, Ph.D., 46, president, Merck Research Laboratories.
Capitalizing on Growth Opportunities
We are achieving impressive progress in changing the drug discovery and development process by making use of the benefits of the scientific revolution now under way and by implementing innovative practices and procedures at every stage. As a result:
- We are working to increase the probability of success in the labs and accelerating both early- and late-stage development efforts;
- We are achieving significant improvements in the progression of compounds through our pipeline, and are bringing an increased number of new mechanism compounds into the pipeline;
- We are also preparing for four new vaccines. These include a vaccine for simultaneous immunization against chickenpox, measles, mumps and rubella, which was filed with the FDA in August, and vaccines to help prevent human papillomavirus (HPV) infection and related cervical cancer and genital warts, shingles and the pain associated with it, and rotavirus, expected to be filed in either the second quarter or the second half of 2005. We accelerated the filing of the applications to the FDA for both the shingles and rotavirus vaccines;
- We are improving our prospects for success through external licenses and alliances. As recently as 1999, we closed on just 10 licensing deals. In 2004, we closed on 50 such transactions, which run from research collaborations to preclinical and clinical compounds and technology transactions–a five-fold increase over just five years; and
- With the exception of the delay in the approval of Arcoxia in the U.S., we are on or ahead of schedule with our planned regulatory submissions and Phase III development programs.
All of these actions will allow us to discover and develop the novel drugs the market demands, which, in turn, will drive earnings and cash flow and thus shareholder value.
We are making impressive progress in permanently reducing our cost structure company-wide. Indeed, we have succeeded in accelerating initiatives already under way, resulting in increased cost savings earlier than anticipated.
- By the end of 2004, we eliminated 5,100 positions throughout the Company, exceeding the target of 4,400 positions we announced in October 2003. This will result in about $300 million in savings in 2005, achieving the high end of our original estimate.
- We anticipate that our inventory reduction efforts will realize another $300 million in cost savings by 2006, while our capital initiatives are on track to generate more than $600 million in savings by 2008.
- The changes we have made to procurement are expected to generate another $1.2 billion in savings through 2008, while our shared services program should deliver additional significant savings down the road.
- Furthermore, we expect the savings we are generating in manufacturing to offset inflation.
These actions will enable us to offer our novel medicines at the competitive prices the market demands.
Next, in early 2004, we began a market-driven redesign of our marketing and selling model, as well as of our managed care model, to deliver greater value to providers and payers.
- We are reducing the number of products our professional representatives cover, so they can offer more in-depth knowledge to their physician customers. In addition, each representative calls on fewer physicians, so they have greater knowledge of physicians’ practices. This provides physicians with greater value from their interaction with Merck’s representatives.
- We are customizing our disease information, patient education and formulary information to meet the needs of the physician practice and managed care environment.
- We are making ever greater use of the “e-channel,” making a variety of Merck resources–such as product and disease information, patient education, guidelines and risk assessment tools–readily available to providers on their desktop computers.
- We are working closely with health plans to enhance appropriate utilization of our products and improve overall care, and to help promote access, we are working with both providers and payers to support the success of the Medicare Drug Benefit in 2006.
These initiatives are enabling us to furnish providers and payers with the value they want from their interactions with Merck, while allowing us to support both our in-line products and our new products more efficiently and effectively.
All of these efforts are made possible because of Merck’s strong financial foundation. Our financial strength enables us to invest in the business to drive growth, as well as supports significant shareholder returns. We are committed to maintaining annual dividends in excess of $3 billion and to continuing share repurchases, over time, from operating cash flow.
Merck’s financial strength is reinforced by strong future cash flow generation potential. Our conservative financial management allows us to invest in business growth. Our financial strength also allows us to continue to aggressively seek the sort of external growth opportunities, ranging from preclinical compounds to in-line products, which add real value to our pipeline. Our financial strength will help drive our Company’s future growth.
The past year presented Merck with an extraordinary challenge. But we have met this challenge in a manner consistent with our commitment to patient safety, to the highest standards of ethics, and to scientific excellence.
- We moved quickly to respond to the effects of our voluntary withdrawal of Vioxx on the Company, and the actions we took are producing results.
- We have accelerated changes already under way to meet the opportunities and challenges we face given the demands of the market and of the environment in which we operate.
As a result, Merck is moving forward into 2005 well positioned to achieve the future long-term growth to which we are committed and which you, our shareholders, expect.
Raymond V. Gilmartin
Chairman, President and Chief Executive Officer
February 22, 2005