To Our Shareholders:
The people of Merck continue to work hard to change our company, driven by
our determination to be the industry leader. And although we are only
approaching the half-way mark in our five-year strategy to turn this company
around, our 2007 results increase my confidence in our ability to achieve that
goal and the others we set for 2010, positioning Merck for success in the
years beyond.
In 2007, our Plan to Win began to pay off with results for Merck, for our
shareholders, for customers, and most importantly, for patients. As you’ll
read throughout this report, we are achieving significant and sustainable
results, accelerating our discovery and development of ground-breaking new
medicines and vaccines, and beginning to regain industry leadership.
Achieving Results
Merck’s 2007 results demonstrate real progress against the goals we put in
place for 2010. Here is a summary of these goals and our progress:
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– Achieve double-digit compound annual earnings-per-share growth, excluding
certain items, from 2005 to 2010. We are on track to achieve that
goal.
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– Deliver compound annual revenue growth of 4 to 6 percent by 2010,
including half of joint-venture revenue. We are on target to produce
that growth.
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– Return Merck’s product gross margin beyond 2008 to the level we had
before Zocor, our biggest-selling product ever, lost patent
exclusivity. We are on pace to achieve that goal a full year ahead of
schedule.
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– Return marketing and administrative expenses to 2006 levels by 2010.
Although we have increased spending in the short term to fully support our
product launches, we remain committed to that goal and expect to
achieve it on schedule.
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– Fund our growing research and development efforts fully so that we can
continue to develop medicines and vaccines that make a difference. We
are achieving that goal.
We are harnessing every aspect of our business to drive these results,
including new and in-line products, our growing research pipeline, and new
initiatives designed to make Merck more efficient.
New and In-line Products
Using a new model that quickly gets our products to people around the world,
Merck has launched eight new products in 24 months. New products such as
Gardasil, Januvia and RotaTeq are steadily growing
our revenue as we introduce them worldwide, and more established products
like Singulair, Cozaar/Hyzaar, and joint-venture products
Zetia and Vytorin are driving growth as well. We continue
to increase the contributions of these medicines and vaccines with new
indications that broaden their use and bring their benefits to even more
patients.
For example, in 2007 we received approval for the use of Januvia in
combination with additional medications for the treatment of type 2 diabetes.
We have also asked the U.S. Food and Drug Administration (FDA) to approve the
use of Gardasil to help protect against vaginal and vulvar cancers,
as well as to expand the vaccine’s use to women between the ages of 27 and
45. And later this year, we expect to file for approval to use our newest
medicine, Isentress, as a first-line therapy for HIV/AIDS.
Research Pipeline
We continue to grow our research pipeline with innovative medicines and
vaccines that will make a true difference in the lives of patients. Our
newest product, Emend for Injection, an intravenous therapy to help
reduce the nausea and vomiting experienced by many cancer patients undergoing
chemotherapy, was approved by the FDA in January 2008. And
Cordaptive, the proposed trademark for our new medicine for helping
to manage cholesterol, is currently under FDA review.
In 2008, we also expect to file New Drug Applications for MK-0524B, which is
Cordaptive combined with simvastatin (Zocor), and MK-0364
(also called taranabant), which has shown weight loss benefits in early
clinical trials.
In addition, our pipeline includes five other promising medicines and vaccines
in Phase III development, including new treatments for migraine, cancer,
heart failure and osteoporosis, plus a new vaccine for hepatitis B for
adults.
Business Efficiency
Of course, revenue growth and new products alone will not allow us to attain optimal levels of growth, which is why we are also aggressively changing the way we work to
become more efficient.
Returning our product gross margin to pre-Zocor levels is critical
to this effort. As I stated earlier, we expect to achieve that goal a full
year ahead of schedule – a direct result of the cost-saving measures we’ve
implemented. We are eliminating waste from our supply chain; creating
lower-cost manufacturing partnerships; and we have completed the closure or
sale of five plants in our internal manufacturing network.
The results we have achieved are a testament to how hard every Merck employee
has worked to completely transform every aspect of our company. The last few
years have confirmed what I’ve always believed: never underestimate the people
of Merck.
And I could not be prouder of the senior management team that is leading the
company through this period of transformation. The team is a good mix of
Merck’s best and brightest along with new, external perspectives, and it is
second to none.
Accelerating Discovery
Nowhere is our transformation more evident than in Merck’s research and
development efforts. We are moving products through our research pipeline
more quickly, and at the same time, using exciting new technology to increase
the chances that our initial discoveries will end up as products that improve
and save lives. And, we are growing our pipeline not only through our
internal efforts, but also through strategic external partnerships.
One of the most impressive examples of the impact of this transformation is
our reduction in clinical development cycle times, or how long it takes to
complete the three phases of clinical studies and move a product through our
pipeline.
Before we began transforming Merck’s R&D process, our clinical studies
progressed more slowly than those of most of our peers. But a recent
evaluation by an independent industry expert found that Merck has
substantially improved its performance on this important measure. We now rank
either at or near the top in how quickly we can initiate and enroll patients
in a study, as well as how quickly we can complete it, while never forgetting
our dedication to patient safety.
When we launched our breakthrough HIV/AIDS treatment Isentress in
October, we were 18 months ahead of schedule. This acceleration gave patients
like Scott Gilmore, for whom existing treatments had ceased to work, access
to the life-saving potential of Isentress much earlier than
anticipated. You can read more about the difference Isentress has
made in Scott’s life later in this report.
For Merck, bringing the best of science to patients also means working with
the best science. In 2007, we developed 55 significant new partnerships,
bringing our total to nearly 250 in the last five years. Our “virtual
lab” of partners around the globe allows us to use the best emerging
technologies, work with the latest scientific developments, and develop those
products that hold the greatest promise for patients.
Regaining Leadership
Looking ahead, we will know our strategy has succeeded when Merck is again
the company patients, health care professionals and payers look to for
unmatched scientific excellence, and when our shareholders again look to us as
the industry leader in value and performance.
A key part of achieving this goal is becoming even more transparent in how we
meet our obligations to these groups. This is an essential step in restoring
trust in our industry – and, in fact, in science and medicine. We must do
this not only for our own sake, but for the good of patients.
Serving patients also means that we have to get our innovative medicines and
vaccines to those who need them. For more than 50 years, we have provided free medicines to
millions of Americans as part of the Merck Patient Assistance Program. And we have created
a program that provides our adult vaccines free to the uninsured in the United States.
And Merck continues to break new ground globally
with public-private partnerships that help get our latest vaccines to the
developing world as quickly as possible. We are also working to ensure that
people living with HIV infection worldwide have access to our newest medicines, and that our highly
regarded Mectizan Donation Program will continue to thrive in the
21st century.
It is because of our commitment to those we serve that we have taken on the
challenge of changing Merck’s business model. Our Plan to Win is
about more than achieving our goals for 2010. It’s about positioning Merck
far beyond then, so that we can continue to meet our commitment to the people
who count on us.
Sincerely,
Dick Clark
Chairman, President and
Chief Executive Officer
February 15, 2008
