Remarks by Raymond V. Gilmartin
Chairman, President, and CEO, Merck & Co., Inc.
2003 Annual Shareholders Meeting
April 22, 2003
As prepared
The people of Merck are joined by an extraordinary sense of purpose - to discover and develop the best of medicines and to bring those medicines to people everywhere. Motivated by this purpose, we discover novel medicines and vaccines and demonstrate their effectiveness in advancing patient care. Mindful of this purpose, we work with integrity; develop strong leaders; and seek to improve access to medicines. And mastering this purpose brings success to our people, our company, and you – our investors.
This is one of the most important meetings of the year for Merck. This is the time when we report to you the performance of our company.
Let's begin with our financial performance over the past year.
Merck’s revenue increased to $51.8 billion, a 9 percent increase over 2001. And we had Earnings Per Share of $3.14, the same as 2001, in large part reflecting the impact of major patent expirations. Despite that, we continued to invest in research and development, spending $2.7 billion dollars – a 9 percent increase over the prior year.
If we look at total shareholder return - measured as share price performance and dividends paid - for the five years ending December 2002, Merck's return is 17 percent, while the Dow Jones Pharmaceutical Index returned 24 percent and the S&P 500 Index returned a negative 3 percent. Prior to patent expirations, we essentially performed in line with the Dow Jones Pharmaceutical Index and outperformed the stock market as a whole.
Looking at the period from the beginning of 2002 through March of this year, the S&P total return was a negative 25 percent, the Dow Jones Pharmaceutical Index total return was off 20 percent, while Merck’s return was off only 4 percent, despite the fact that we showed no earnings growth for 2002.
This suggests that investors look beyond short-term earnings growth and consider a broader array of financial measures when evaluating a company's performance and deciding whether to invest.
In this year's BusinessWeek that ranked the 50 top-performing companies, Merck was ranked No. 20, up from No. 40 in 2002. BusinessWeek looks at eight different measures – to capture both the momentum and the sustainability of corporate achievements. They rank companies according to growth in sales and earnings over one and three years; annual profit margins; annual return on equity; and how well shareholders have done over one and three years.
BusinessWeek has been ranking the top-performing companies in the S&P 500 Index for seven years. Merck is the only company to make the list all seven out of seven years.
In addition to the measures used by BusinessWeek to rank the best performing companies, what is also important to investors is the financial strength of a company.
We’re one of only 6 U.S. industrial companies to receive a Triple-A credit rating. In addition, over the past five years, we’ve returned more than 90 percent of our net income – a total of $31 billion – to shareholders through dividends and stock buy-backs.
Investors also look beyond the short-term earnings financials to the true fundamentals, which in our case is our pipeline: our development of novel medicines, which ultimately determines the future growth and the value of our company. I would suggest that investors evaluate pipelines using strict measures: they look at what drugs have just been approved, or are with the FDA awaiting approval, and what drugs are far enough along in the pipeline that they’re about to be filed with the FDA.
Let me spend a few minutes talking about our medicines that have recently been approved, those that are about to be filed, and the medicines that are in our late-stage pipeline.
Zetia received approval last October. Zetia, which is the first in a class of cholesterol-lowering drugs, comes from our partnership with Schering-Plough. As you’ll see in this short video, Zetia proved to be good news. This evening news segment is representative of similar reports seen on many other news stations across the country. Zetia gives doctors a new way to help millions of patients reach their cholesterol-lowering goals.
On New Year’s Eve we had another reason to celebrate when the FDA approved our asthma drug Singulair for expanded use in treating seasonal allergic rhinitis in adults and in children as young as two years old.
And just last month the FDA approved Emend for patients undergoing highly emetogenic cancer chemotherapy. In fact, the FDA granted Emend an accelerated review because it’s a new mechanism of action and is the only medicine for the treatment of acute and delayed nausea and vomiting.
Zetia, for lowering cholesterol; Singulair, for seasonal allergic rhinitis; and Emend for acute and delayed emetic symptoms, are all significant advances in patient care. These medicines are outstanding examples of the excellence of our research and development.
Dennis Choi, one of Merck’s executive vice presidents in our research labs, recently left a tenured position as head of the Department of Neurology at Washington University to join Merck. He said Merck attracted him because of our rich history of turning cutting-edge science into novel medicines that represent true advances in patient care. Dennis, along with thousands of people in Merck Research Labs, is working on ways to “get new medicines to people who need them as soon as possible.”
In addition to discovering and developing novel medicines, we back up our advances with proven clinical outcomes. Over the past year, we’ve announced the results of important outcomes studies with Vioxx, Cozaar, and Zetia. Peter Kim will tell you more about those studies as part of his remarks.
Shahnaz Shahinfar, one of Merck’s senior directors of clinical research, said, “When our studies demonstrate results, they can make a dramatic difference in patients’ lives and the ways in which doctors use medicines.”
In terms of drugs about to be filed with the FDA, we expect the Merck/Schering-Plough joint venture to file a new drug application for the Zetia/Zocor combination tablet late this year.
We also anticipate filing a new drug application with the FDA for Arcoxia in the second half of this year. Arcoxia is Merck’s newest once-a-day coxib, which has been launched in 23 countries outside of the United States and it has been studied in a broad range of chronic and acute indications such as acute gouty arthritis and ankylosing spondylitis.
And in Phase III trials we have medicines, including:
Peter Kim will also talk about these in greater detail.
The human papillomavirus, or HPV, vaccine is particularly exciting and has generated considerable attention. Our studies focus on four different subtypes of HPV, and two of them are associated with a majority of cervical cancer deaths. We analyzed two years of data and found very promising results.
The following segment from "NBC Nightly News" with Tom Brokaw shows the level of excitement in the medical and scientific communities about these study results.
Although it is still in Phase III, this vaccine has the potential to make a tremendous difference in millions of lives worldwide.
In other good news, yesterday we announced very positive first quarter results. Revenue for the quarter grew to $13.4 billion, a 10 percent increase over the same period in 2002. Our earnings per share were .76 cents, which is a 7 percent increase over the same period last year and in line with our expectations. Importantly, our growth was driven by a healthy increase in the volume of products sold by our core pharma business, where we saw volume increases of 11 percent in both our U.S. and our ex-U.S. segments.
So we see that our strategy is paying off in increased fundamental demand for our products around the world. In addition, we announced that we expect research and development to grow by a mid-teens percentage rate in 2003, reflecting increases across the board - from basic to late-stage clinical research as we capitalize on the scientific opportunities that have been identified in our labs.
We continue to expect a return to double-digit EPS growth in the core pharmaceuticals business in 2003. We also remain firmly committed to our longer-term financial goal of top-tier earnings per share growth among the leading pharmaceutical companies.
Also, last month we successfully completed the tender offer for Banyu Pharmaceuticals. We’ve owned approximately 51 percent of Banyu since 1984. As a result of our tender offer, we now own 95 percent of Banyu common stock. Banyu expands significantly our presence in Japan – the world’s second largest pharmaceutical market.
And earlier today, we announced that the Merck Board approved a 100 percent spin-off of Medco Health Solutions, Inc., our wholly owned pharmacy benefits management, or PBM, subsidiary. We plan to complete the separation through a one-step transaction intended to be tax-free to Merck and its U.S. shareholders.
Last year, we announced our plans to establish Medco Health as a separate, publicly traded company. The separation was designed to enhance the success of both Merck and Medco Health by enabling each one to pursue its unique and focused strategy. This transaction, which also includes a cash dividend from Medco Health to Merck, will achieve that objective and will provide our shareholders with equity in two very successful companies with significant growth potential.
These actions further strengthen the focus of Merck as a research-based pharmaceutical company. Clearly, we care a lot about the results we achieve: about how fast sales and earnings grow, about how well our stock performs, and about the medicines we discover. But, we also care a lot about how we achieve those results.
In 1995 we created the Ethics Office and appointed Jackie Brevard as the chief ethics officer. Recently she said, “Shareholders would expect a company like ours to invest in research, marketing and manufacturing. But there is another priority investment for Merck: it is ethics, values and standards.”
And she’s right. We conduct ourselves with the highest standards of ethics and integrity and strive to treat people with dignity and respect both within and outside of the company. Our ethics, values and standards extend throughout the company. Our values govern our behavior from the bottom line, to the manufacturing line to front line of our sales organizations.
I was with an analyst from an institutional investor recently. And he said that a cardiologist told him that Merck’s sales representatives are not as aggressive as other sales reps; that we tend to be more science-based in our sales approach. He asked me, “What do you intend to do about that?” And I said, “I intend to reinforce that behavior.”
What the analyst came to understand is that it’s not the aggressiveness of a sales force that drives competitive advantage. It’s the scientific and balanced approach we use when we’re talking about our medicines.
We care about the results we achieve; we care about the drugs we discover; and we also care about whether people have access to our medicines. We are committed to helping people gain access to vaccines and medicines worldwide. In the developing world, we are focused on vaccines and HIV/AIDS.
We provide our antiretroviral medicines, Crixivan and Stocrin, at prices which we make no profit to the least-developed countries and to those hardest hit by HIV/AIDS. And in other developing countries we sell those drugs at significant discounts. But offering lower prices is not sufficient. We’re doing much more. In Africa, for example, we helped train about 1,500 physicians on up-to-date methods of HIV/AIDS patient management and the use of antiretroviral medicines.
We have a more ambitious program in Romania. In addition to providing our antiretroviral medicines at no profit, The Merck Company Foundation donated $1 million to help establish a network of regional AIDS treatment centers in Romania, and in November we provided an additional $250,000.
Today Romania is one of the few countries that provides antiretroviral treatment to all HIV-positive patients who need treatment. Adrian Caretu, Merck’s country manager of Merck Sharp and Dohme in Romania, said, “What really matters is that you do all you can to help find a solution.”
Even more ambitious is our work in Botswana. Merck has joined a partnership with the Government of Botswana and the Bill and Melinda Gates Foundation to create a comprehensive HIV/AIDS program.
The Gates Foundation is providing $50 million; and the Merck Foundation is providing $50 million. We are also providing our antiretrovirals at no cost. But far beyond that, we are involved in a comprehensive program that runs from prevention and education to treatment and care.
Our efforts include helping to prevent the transmission of HIV through education and public awareness. We’re helping train physicians and nurses and building health care centers. And we’re building coalitions among churches, communities, and non-profit organizations to support AIDS victims and their families, such as with orphan day care centers.
In the words of Botswana President Festus Mogae, our partnership “demonstrates to the people of Botswana that we are not alone in the fight against the epidemic…”
Through efforts like our partnership in Botswana, we hope to create a model that other countries can follow to conquer HIV/AIDS. Of course the most important goal is to develop a vaccine to prevent this disease. In December 1999, our scientists began testing a potential HIV vaccine on the first human subjects. To date, our investigational HIV vaccine looks promising in these first clinical studies…but in the mean time, we continue to look at other approaches.
Our work in Botswana builds on the success of our Mectizan Donation Program. Last year we celebrated the 15th anniversary of the program, which treats river blindness. I went to Tanzania to take part in the celebration last September. We are now reaching 30 million people living in 33 countries.
One of the great partners in the Mectizan project is the Carter Center. Due to the personal commitment of former President Jimmy Carter and in celebration of World Sight Day last year, we appeared together on the Today Show with Katie Couric. Here is a segment of that show…
In the U.S., we are actively involved in access through a number of measures. For 50 years we’ve had a successful Patient Assistance Program for people who can’t afford our medicine and who are not eligible for private insurance or prescription reimbursement through a state Medicaid program. What’s unfortunate is that some people who truly need help, for whatever reasons, won’t ask for help. So we have to move beyond charity to what people really need – prescription drug coverage.
We are recognized as a leading advocate for adding prescription drug coverage to Medicare. We support a program that allows seniors to choose their coverage from qualified, private health plans that rely on market competition, not government price controls, to improve quality, integrate care, and manage costs.
The president and lawmakers have said that every senior deserves the same choice and the same health coverage as their representatives in Congress. We remain optimistic that meaningful legislation will be passed this year because of the strong commitment of the President and influential members of Congress.
Because of our ethics and the fact that we care about people having access to our medicines, we are recognized worldwide for our efforts to improve global health. A recent issue of the Economist highlighted our work, and as you can see, indicated that we – and I want emphasize that it’s everyone at Merck – have earned high praise.
In addition, the Economist pointed out that Merck earned one of only two triple-A ratings for ethics by the Management & Excellence group. In the same article, the magazine questioned how our philanthropic work contributes to overall performance.
Our efforts in Africa and elsewhere extend beyond corporate philanthropy. They are an integral part of our business strategy. By serving the interests of society, Merck’s interests and the interests of our shareholders are well-served. Discovering medicines that people don’t have access to is of no benefit to patients or our shareholders.
Because we work to bring the discoveries of our scientists to the people who need our medicine worldwide; and because of our ethics, values and standards, we are able to attract and retain great talent and great leaders.
When Peter Kim was in the final stages of deciding whether to leave MIT and join Merck, he came to my office with two questions. He wanted to know, first, if Merck was committed to being on the leading edge of science. And secondly, he asked, would Merck still be Merck? He was looking for an assurance that the attributes and characteristics I’ve described today would continue. Clearly, Peter was convinced.
I single Peter out at this point for two reasons. First, because he’s our new President of Merck Research Laboratories – Ed Scolnick’s hand-picked successor. And second, because he represents the kind of people we attract to Merck…and the kind of people we already have at Merck.
Louise Park Stejbach noted that “Strong leadership skills evolve over time, not only through day-to-day practice, but also by learning from experienced, diverse leaders.”
Earlier I introduced our management team. Some are familiar faces; others are new to the team or have accepted broader responsibilities as of January 1st. The distinguishing characteristic about this management team is that we differ in race, gender, ethnicity and national origin. We represent a diversity of ideas and a diversity of backgrounds. But, like the people at Merck, we are all joined by an extraordinary sense of purpose.
Similarly, the members of our board are very talented and committed people who come from diverse backgrounds. While the structure and form of a corporate board is important, I believe it’s even more important to focus on how a board functions: how a board inquires, deliberates, and engages with Company management and with each other. I can assure you that our board is successful in both form and function.
This year we celebrate the 100th anniversary of our Rahway site. For a century Merck employees have become leaders in their fields, respected in the U.S. and worldwide for their dedication, knowledge and discoveries.
The history of Merck R&D is one of unparalleled achievement. But I want to assure you that neither I nor my management team are content to rest on Merck’s past successes. Do we believe in Merck’s future? In a word, “Absolutely.” What has always made Merck an extraordinary company is its commitment to scientific excellence and its adherence to ethics, values and integrity in all its dealings.
Over time, R&D excellence – the ability to translate cutting edge science into breakthrough medicines – is the only sustainable basis for success in this industry. That is why we have continued to invest in Merck’s internal scientific capabilities and external collaborations. These capabilities, together with Merck’s people and their extraordinary sense of purpose, will allow the company to continue discovering and developing medically-important new drugs and build shareholder value for many years to come.
And now, please welcome to the stage, Dr. Peter Kim.
# # #
