It’s been a year since I reported to you about Merck’s Plan to Win — our blueprint for returning Merck to the industry–leading position it once enjoyed and which we are committed to reclaim.
I am pleased to report that the results of the past 12 months confirm that we are off to a strong start in executing our plan. During 2006:
- We successfully launched five new vaccines and medicines — Gardasil, Januvia, Zostavax, Zolinza and RotaTeq — that are breaking new ground in the fight against diseases such as cancer and diabetes;
- We advanced promising products in our pipeline at every phase of development and across our therapeutic areas, while continuing to fundamentally change the way we discover, develop, manufacture and market our medicines and vaccines; and
- We achieved impressive sales growth in such products as Singulair, and joint venture products Vytorin and Zetia.
As I look back over the past year, I believe we have gathered the momentum needed to meet the performance goal we established in December 2005: delivering double–digit compound annual earnings–per–share growth, excluding charges and one–time items, by 2010.
And as I look at the year ahead, I am confident that we are poised to build on the success of 2006.
In 2007, we expect to file three New Drug Applications with the U.S. Food and Drug Administration (FDA). They include raltegravir (MK–0518), a promising first–in–class treatment for HIV infection; gaboxadol, a novel compound to treat insomnia; and a compound that combines Merck’s own extended–release (ER) niacin with laropiprant. This last compound, also known as MK–0524A, is expected to further help patients manage cholesterol by decreasing LDL cholesterol, increasing HDL cholesterol and lowering triglycerides.
These filings are in addition to the three products already under review at the FDA: Janumet, a medicine for the treatment of type 2 diabetes; Emend For Injection (MK–0517), an intravenous therapy to help reduce the nausea and vomiting experienced by many cancer patients receiving chemotherapy; and Arcoxia, our medicine for reducing the pain caused by osteoarthritis.
These products are just some of the results of our efforts to improve productivity at all stages of our pipeline. We have increased the productivity of our early–stage pipeline, generating a steady progression of promising compounds into our later–stage pipeline, while maintaining our high scientific standards.
And we are significantly reducing the time it takes to move a product through every phase of development. In late development, we have already exceeded our prior cycle–time reduction goal by achieving more than a 10–month reduction by the end of 2006, and are on track to make it a 12–month reduction by the end of 2007.
The strength of our pipeline has been further enhanced by our continued commitment to identify and enter into strategic acquisitions and alliances that complement our internal research and development efforts. In 2006, we signed 53 key agreements, including the acquisitions of three leading biotech companies. And we are leveraging these transactions to further strengthen and speed drug discovery at Merck.
In this report, you will read the real–life stories of patients and our five newest medicines and vaccines — products that will make an immeasurable difference in the lives of millions of people around the world. We also expect that these products will make a substantial contribution to Merck’s future success.
The launches of our five new products are evidence of our scientific excellence. But they also clearly indicate that our commitment to create and execute a new commercial model is on target.
We launched these products in the United States without any increase in our sales force, redirecting 1,500 of our sales representatives to our new vaccines. In addition, for more than two years, we’ve been able to hold the line on the size of our sales force by using many new techniques for reaching our customers in ways that meet their needs and the demands on their time.
This past year also has seen us lay the groundwork for creating the lean and flexible cost structure we committed to last year. By the end of 2006, we had already achieved $1 billion of our goal to save $1.2 billion in procurement Company–wide by 2008.
In addition, we already have eliminated 4,800 of the 7,000 positions we committed to eliminate by the end of 2008 and have closed, sold or ceased operations at three manufacturing facilities. We are in the process of doing the same with two other manufacturing facilities we said we’d close or sell by the end of 2008.
We are also restructuring our manufacturing network to make it more competitive, leaner and flexible enough to meet future market needs as quickly as those needs change. That includes achieving a $767 million reduction in inventory since year–end 2003, including a $226 million reduction in 2006, even while launching five new products.
And while achieving operating efficiencies includes direct spending reductions, it also includes executing broader efforts, across the Company, to increase productivity. That is why we are deploying Lean/Six Sigma principles throughout Merck.
Furthermore, as the pace of development in our labs increases, we are making sure that our manufacturing capability is also keeping pace. This way, once a product approval is received, we have the flexibility in our facilities to begin delivering that product to our customers more quickly than ever before.
All of these actions to make Merck leaner and more flexible have put us on track to achieve our $4.5 to $5.0 billion long–term savings goal through 2010.
Of course, even as we change, one thing remains the same. We are still a company whose mission is to discover and develop novel medicines and vaccines that address unmet medical needs, with a commitment to get those products to the people who need them.
That long–standing commitment was broadened in 2006 with the creation of Merck's Vaccine Patient Assistance Program. This new program, which complements our 50–year–old Patient Assistance Program, will provide Merck's adult vaccines (such as Gardasil and Zostavax) free of charge to uninsured U.S. adults age 19 or over who cannot afford them.
And, as you will read elsewhere in this report, we have entered into a partnership with the Nicaraguan government to provide our new vaccine RotaTeq at no charge to every newborn child in that country for the next three years. We are also working with the global health nonprofit PATH and the Bill & Melinda Gates Foundation to develop HPV vaccination programs that will facilitate the introduction of Gardasil in some of the most impoverished nations.
The Merck Company Foundation, which marks its 50th anniversary in 2007, has played an important role in the Company's efforts to enhance the health and well–being of people around the world. Since its inception, the Foundation has contributed more than $480 million to support important initiatives that, for example, support and enhance Botswana's national response to HIV/AIDS, address the complex and growing problem of pediatric asthma in the United States, and improve science education for U.S. students.
This year we're also celebrating another significant milestone in the Company's history of helping patients gain access to our medicines — 20 years of the Mectizan Donation Program. Over the last two decades, Merck has donated close to 500 million doses of Mectizan for the treatment of river blindness, preventing an estimated 40,000 cases of blindness annually in the developing world. It is the largest ongoing medical donation program and longest–standing public–private partnership of its kind — one we're proud to have helped establish and to continue to support.
The people of Merck have worked hard and worked smart to bring about the successes of 2006 and to set the stage for continued success in 2007 and beyond. Two individuals who have helped provide enormous leadership and vision as we work to regain our leadership role, Larry Bossidy and Bill Bowen, are retiring this year from our Board of Directors. I want to thank them for their commitment and outstanding leadership on the Board.
Also retiring this year is Judy Lewent, Merck's chief financial officer for the past 17 years. Judy's business and financial acumen, keen strategic thinking and analytical skills have made her an invaluable advisor and colleague. She will be greatly missed. Judy intends to retire in July, and we have begun a search for her replacement to ensure an orderly transition.
The contributions of all three of these leaders have helped to ensure that we are on a sound course to become a market leader once again.
I am convinced, not just by the success of 2006, but also by the energy and enthusiasm I see throughout the Company, that the changes we are implementing will allow Merck to reach its high-performance potential. And once we do, Merck will again occupy the unquestioned position of scientific and market leadership we know it should.
Chief Executive Officer and President
February 20, 2007