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CLEVELAND—When Raymond V. Gilmartin took up the reins at Merck & Co. in June 1994, the company was faced, he says, by way of understatement, with "very significant challenges."
Though successful for decades, the New Jersey-based pharmaceutical giant had to contend with competition from every angle, thanks to countless scientific advances. And new drug discovery tools meant many fast followers into the marketplace. As Gilmartin (HBS MBA '68), Merck's chairman, president, and chief executive officer, explained in his plenary talk at the HBS 2001 Global Alumni Conference, "In the late '80s, when Merck introduced its pioneer cholesterol drug Mevacor, it was alone on the market for four or five years." Since '94, though, any new drug can be hemmed in by competitors after only a few months.
The second major challenge and the one that continues to face Merck specifically, Gilmartin said, is that the company has been confronting major patent expirations within a five-year period, extending into 2002. Those patents represent some 35 to 40 percent of its sales. "Basically four major blockbuster drugs going off patent," he told the audience.
Given that Merck aspired to be a top-tier growth company, both in revenue and earnings, the company's fundamental strategy—to grow through innovation—meant that dramatic change was imperative. How Merck has battled that problem could be considered a reflection of how new forces and developments in science and genomics are buffeting many segments of the pharmaceutical industry that were accustomed to traditional business practices.
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| It was crucial for us to be able to introduce those medicines on time, with right labels, and with a successful launch in the marketplace—not only to achieve our intermediate and short-term growth objectives, but also to offset the patent expirations. | |
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| —Raymond V. Gilmartin |
"We had to undertake a complete transformation of how Merck operates," Gilmartin said. "The transformation that we're undertaking right now is crucial [for] us to be able to stay on the leading edge of science for the next ten to twenty years," he said.
Upside down
Trained as an electrical engineer, Gilmartin was a development engineer at Eastman Kodak and a management consultant at Arthur D. Little before joining Becton Dickinson and Company, a medical technology firm, as vice president of corporate planning in 1976. He rose through the executive ranks and by 1992 was BD's chairman, president, and chief executive officer. Gilmartin became president and CEO of Merck in June 1994, and less than five months later became chairman as well.
One of the company's first decisions after he came onboard was to step up the level of resources for both scientific research and marketing. Although initially Merck was eyeing manufacturing productivity as a source of funding, the real issue, Gilmartin said, was the company's structure. Like many big companies, Merck was organized into powerful and effective units that had very little to do with each other. The challenge for management was to break out of the silos and learn to delegate more responsibility and authority deeper into the organization.
It usually takes $500 million, on average, to develop and launch a drug, and ten to seventeen years from the initial concept to product launch. "We were facing the great opportunity to introduce sixteen new medicines in about five years; that's more new medicines in that time frame than at any time in the company's history," Gilmartin said. "And it was crucial for us to be able to introduce those medicines on time, with right labels, and with a successful launch in the marketplace—not only to achieve our intermediate and short-term growth objectives, but also to offset the patent expirations."
To do this, the company decided to bring manufacturing and marketing much earlier into the drug development process than before, rather than following the linear route from research to manufacturing to marketing. Manufacturing has had to become more flexible to changes in demand. Marketing, for its part, had to become more strategic and less prone to just churning out promotional materials per the traditional industrial sales model.
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