Merck Stays in Stride

October 1, 2002
Wayne Koberstein
Wayne Koberstein

Wayne Koberstein, a 25-year veteran of the publishing industry, is editor-in-chief of Pharmaceutical Executive magazine. In 14 years as PE's Editor, he has overseen the emergence of the magazine as the leading business and marketing publication for the global pharma industry. He has interviewed and profiled more than 150 top executives in pharmaceutical companies, as well as major regulatory and healthcare leaders, around the world. Wayne has also directed the launch of numerous supplements and other ancillary business for the publication.

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Rarely does the head of a top pharma company agree to meet with a journalist in the midst of a strategic challenge as large as this one-Merck's plan to establish Medco Health Solutions as a separate, publicly traded company.

Rarely does the head of a top pharma company agree to meet with a journalist in the midst of a strategic challenge as large as this one-Merck's plan to establish Medco Health Solutions as a separate, publicly traded company. But on short notice, Ray Gilmartin agrees to answer Pharmaceutical Executive's questions about the sale and other Merck matters. The upshot is a detailed update on Merck's strategy and progress since PE last interviewed him. (See "The Inner Merck," January 2000.)

In his usual straightforward, unassuming style, Gilmartin shares the latest developments in Merck's delayed divestiture of its Medco division, the leading US pharmacy benefits manager (PBM). He explains why Merck purchased Medco in the industry's first "forward integration" into the PBM world, and why it now plans to spin it off.

Gilmartin sticks to Merck's long-standing anti-merger policy but points to a wealth of partnerships that extend the company's R&D and marketing reach and continue its "not-invented-here" tradition. Although Merck has fallen in industry ranks from number one to number three in recent years, Gilmartin remains unshaken in his basic strategy: Maintain a steady flow of new products and work toward a realistic pricing and profit structure in the era of managed care.

Last year, Merck's earnings-per-share growth statistics landed in the single digits-8 percent.

Yet Gilmartin promises better times to come with products and indications based on new pathways to therapy in their respective disease areas.

He details unique developments with the pain medicine Vioxx (rofecoxib) and the cholesterol-modifying Zocor (simvastatin). And he previews new products in the pipeline-Merck plans up to 11 filings or launches by 2006-such as the COX-2 follow-up Arcoxia (etoricoxib), lipid-lowerer Zetia (ezetimibe), and the allergic rhinitis indication for Singulair (montelukast). Merck has a partnership with Schering-Plough to develop Zetia.

Gilmartin also shares his views and company positions on the Pharmaceutical Research and Manufacturing Association's (PhRMA) new marketing code, recent accounting scandals, genomics, partnering, brand management, R&D/marketing collaboration, company reputation, recruitment, prescription drug coverage under Medicare, and the industry's future.

Inner Merck Milestones

Earlier this year, Gilmartin appeared in a television interview with ABC's Peter Jennings on a program that evoked all the current populist sentiments against pharma companies. Seeing Gilmartin in person confirms how his understated but clear-eyed style belies one of the most effective presences in the pharmaceutical executive universe. In a small conference room near his office, he offers an appropriate starting point-our previous profile.

Gilmartin: I had a chance to reread the article that you did on us in 2000, and I'm happy to say that there's a lot of consistency with what we're still doing. I also appreciated the scope of that article, in laying out our thinking and how we approach the marketplace.

PE: What new milestones have you reached since then?

Gilmartin: Significant things have happened because we laid out the strategy that we continue to pursue-translating cutting-edge science into breakthrough drugs. "Breakthrough" is not a slogan for us; it clearly defines how we spend our research dollars. We spend those dollars looking for cures for diseases that affect large patient populations with major unmet needs worldwide, and for new knowledge about the pathways to disease so we can come up with novel mechanisms of action to treat them.

Ray Gilmartin

On top of that, we have two formulation design criteria: once-a-day oral, so it's convenient, and highly potent and targeted, so it's safe. That's what we shoot for, and we get there almost every time. The only variations on the oral side are with some of our antibiotics or antifungals, because it's not easy to get them into those forms.

PE: So your strategy has remained the same?

Gilmartin: That has been a consistent Merck strategy over the years, but it has become more important because of the increasing influence of managed care, concern about the cost of pharmaceutical care, and questions about the value of our products. Therefore, our strategy is to offer major advances in patient care, in outcomes that patients experience, that doctors believe are important, and that payers see as having value. Because of the kinds of medicines that we produce, we can demonstrate those major advances in patient care, and we reinforce that through major outcomes studies. (See "Nobody Argues with Merck's Portfolio,")

Nobody Argues with Merck's Portfolio

PE: What would you list among the positive results of that strategy?

Gilmartin: We continue to expand our pipeline of products into major categories with new pathways. We have 11 new products to file or launch between now and 2006, and they all meet the characteristic of new pathways. Plus, we have a new indication for Singulair which, if approved, will be the first new class of allergy therapy in more than a decade. (See "Up and Coming.")

We now have five products that account for about two-thirds of our sales, growing 25-30 percent a year. Four of the five are reinforced by outcomes and the other by convenience.

Up and Coming

Take Vioxx, for example. The label that we received recently demonstrating the benefit of reducing serious gastrointestinal side effects is a significant milestone for us. It is the only product in the class to have demonstrated those kinds of outcomes-a greater than 50 percent reduction in serious GI side effects.

More than 100,000 people a year go to emergency rooms with spontaneous bleeding or perforations. Four-fifths of them have no clue why, because they've had no prior symptoms; half of them have no risk factors, such as gender, age, or health status. Of that 100,000, almost 17,000 die. Vioxx makes a serious contribution by significantly reducing those incidents.

Coupled with that, we included other data in the label that put in perspective any risks associated with the drug, pointing out that we compared Vioxx against Naproxen [naprosyn], which had a lower rate of heart attacks or cardiovascular events in that study. We were also able to include all our other data for Vioxx against placebo, in which there was no safety difference.

PE: How have you used outcomes data to reinforce other major products?

Gilmartin: A heart-protection study for Zocor demonstrated for the first time that people with cardiovascular disease risk factors, such as diabetes, could benefit from 40 milligrams of Zocor with a significant reduction in cardiovascular events, regardless of whether they had normal or high cholesterol levels.

With our antihypertensive Cozaar [losartan] there were two important outcomes studies. One was the RENAAL [Reduction of Endpoints in Non-Insulin Dependent Diabetes Mellitus with the Angiotensin II Antagonist Losartan] study, which showed that Type 2 diabetics taking Cozaar had about a 25 percent reduction in the incidence of end-stage renal disease. Another study, called LIFE [Losartan Intervention for Endpoint Reduction in Hypertension] compared Cozaar with a beta-blocker [atenolol]. For patients on Cozaar it showed a reduction in progression toward Type 2 diabetes and in helping patients reduce the combined risk of cardiovascular disease and death.

Structure of Health

PE: You also mentioned convenience as a product reinforcement.

Gilmartin: With Fosamax [alendronate], we introduced a once-weekly dose, which really accelerated the growth of the product because women found it very convenient to take Fosamax, even in its original, once-a-day form.

PE: Were the reinforcements afterthoughts or part of the original plan for the products?

Gilmartin: Although Zocor came in the early '90s, four of those five products presented new pathways, new ways of us entering the field, and each has been extremely successful because of the benefits they bring. But we saw fit to reinforce them by doing major outcomes studies to further enhance their value for patients, physicians, and payers.

PE: When you do an outcomes study, how do you decide what to do and who to involve in that decision?

Gilmartin: I don't get directly involved. We have a high level of interaction between our research and marketing people to determine whether to continue studies after the product is already on the market, what the possible benefits are, and what we think we can accomplish. It requires a high degree of interaction between the marketing and research organizations, with the research organization essentially in charge. And that's well understood. The studies that we do here are designed to produce results that we can file with FDA.

PE: They're not just glorified market research.

Gilmartin: Exactly. It takes a considerable amount of insight and judgment-because they are large trials that require major investments-to determine the likelihood of getting a positive result.

Performance Tested

Positive results sometimes prove ephemeral-vanishing suddenly, if temporarily, in a haze of unfavorable data. Gilmartin explains how such a simple twist of fate last year reduced the company's growth rate and set off alarms in the financial community.

PE: Merck achieved only 8 percent growth in 2001. What happened?

Gilmartin: Because of the new products we introduced since early 1995 and others coming out of the pipeline, we expected to ride through the patent-expiration period of 2001–2002 and still show competitive growth rates. We were well on track to do that through midyear 2001. Then, in August, the article in the Journal of the American Medical Association came out and got widespread press coverage, raising questions about the safety of the coxib class and resulting in a four-point drop of its share in NSAIDs, affecting both Vioxx and Celebrex [celecoxib].

We had projected Vioxx sales of $3-$3.5 billion for the end of last year, but we ended up with about $2.6 billion. That's a successful product in its own right, but not as successful as we had projected. So, instead of growing in the competitive 9-12 percent range-the expectation for last year-we fell short of that with an 8 percent growth rate. Then, this year, that shortfall in sales put us into a balancing act in dealing with patent expirations but, at the same time, we invested in our research strategy.

PE: How does that turn out in next year's budget and forecasts?

Gilmartin: Our expectation this year is to boost our research spending to about $2.7–$2.8 billion, an 10–14 percent increase, and still maintain promotion at the appropriate levels behind our major growth drivers. Then we will look for savings through efficiencies in other parts of the company to help finance that.

That is an expansion of our approach in manufacturing, in which we used efficiencies to offset the damage of inflation, with no price increases, then invested any additional savings to promote the growth drivers. Our balancing act this year was to move beyond manufacturing savings, which is a continuing program, and look at other areas of the company so we could still finance our research and support our major products.

PE: Is it still possible for a huge company like Merck to satisfy stockholders' high expectations? Should there be some kind of adjustment in what they expect?

Gilmartin: I don't believe there's any need for adjustment. Our growth potential remains as strong as it has been, even at our size. We will have 11 products entering major therapeutic areas. Among them are a new treatment for depression, Substance P, which we moved into large-scale clinical trials; a new treatment for anxiety; a new one for diabetes; and a vaccine to prevent human papillomavirus, the leading cause of cervical cancer.

Also, through our partnership with Schering-Plough, we have the first significant new mechanism for managing cholesterol since the 1980s-the combination of the cholesterol inhibitor Zetia with Zocor. It has the capability to lower LDL ("bad" cholesterol) and, at the same time, to avoid the mechanism-based side effects that accompany high doses of a statin or a highly potent statin.

As part of that lineup, and in demonstration of our ability to work on the leading edge, is the discovery of a compound to inhibit the integrase enzyme in HIV, which is crucial at this point. That has been an industry target for a long time, but it's very hard to hit. We're entering Phase I trials now.

That's important because 80 percent of people being treated are resistant to one or more antiretrovirals, and of the treatment-naive population, about 20 percent are drug-resistant. So this next compound, an HIV integrase inhibitor, will be important.

We also are recognized by the scientific community as having made significant advances toward the development of an HIV vaccine. That is ultimately the only way that HIV will be brought under control. We're quite excited that what we're doing will make a big contribution, not only to patient care but also to public health globally.

Medco Unbound?

Earlier this year, Merck announced that it would shed its Medco division, a pharmacy benefits manager that Merck purchased in the early 1990s. Then, in July, the company withdrew the Medco initial public offering (IPO), reportedly, because of the continuing bear market. Gilmartin traces the logical path from Medco's purchase to its offering and sudden withdrawal.

PE: What benefits has Medco brought to Merck?

Gilmartin: Since 1994, we have taken the approach that, when you have two very different businesses within the same corporate structure, you must be able to demonstrate that both businesses grow faster by putting them together than by keeping them as independent companies. We've been able to do that with Merck and Medco.

Merck's contribution to the prescription benefit management business was to transfer clinical expertise that Medco used as a nucleus to build its own independent clinical capability to execute its health management strategies.

The whole idea of Medco was: How do you control the great increase of drug spending by improving the quality of pharmaceutical care? How do you deliver that care in a cost-effective way by obtaining competitive prices from manufacturers and through appropriate use of pharmaceuticals? So Medco's competitive position and its leadership in setting a standard for the industry was enhanced by its relationship with Merck.

Similarly, Merck, which in the early '90s had no experience in managed care, decided that it was an opportunity, not a threat. Medco gave us a lot of experience and know-how in managed care. At this point, we are as competitive on any formulary as we are on Medco's.

Of course, we've operated Medco independently so it could be sure to have no appearance of conflict with its plan sponsors by being associated with Merck. The fact that it has renewed about 90 percent of its clients indicates that's not been a barrier. At the same time, we've been able to deal effectively with other manufacturers, and similarly, Merck has had to deal with all other PBMs and health plans.

PE: Why did Merck decide to divest itself of Medco?

Gilmartin: We reached a point where Medco doesn't need Merck for clinical capability. It has its own fully formed stand-alone capability, and there's not much more of value that Merck can add to it.

Similarly, because of our broad position in managed care, Medco can't add much more value to Merck. Medco is fully capable of serving the purpose that we want it to serve, which is the responsible and appropriate use of pharmaceuticals-that is, in a way that is appropriate to patients and that delivers the health outcomes promised by the pharmaceutical company. There's not much more we can add to that.

Once you get to that point, you're not creating additional value for shareholders. In fact, you run the risk of diminishing the value of both businesses, because you're now mixing two very different kinds of enterprises and confusing their financial characteristics.

Looking at it from that standpoint, we said, "Now is an appropriate time to make Medco an independent company that's publicly traded." We believed, at that point, that it could pursue its growth strategy fully independent of Merck better than it could as part of us.

With Merck entering a new cycle of product launches and filings, this would have been an appropriate time to have the clarity of the pharma business' performance in front of investors so they could see, without any blurring, its growth and profitability characteristics.

PE: Why, then, did you decide to withdraw Medco from sale?

Gilmartin: We postponed the launch of the Medco Health IPO solely because of market conditions.

Over the Fence

Merck has always had a reputation for excellent in-house research, but since the mid-nineties it has accelerated its efforts with outside research alliances. Gilmartin describes some of the ways the company has changed in response.

PE: How have you organized Merck internally to make optimum use of external research partnerships?

Gilmartin: We appointed Ben Shapiro as head of our licensing and business development function, which we redefined as accessing external research, recognizing that there was so much going on outside of the company that we really had to be engaged in. If you define your strategy as being on the leading edge of science and translate that into breakthrough medicines, you have to ensure that you really are on the leading edge of science, and you cannot do that entirely in house. We have been quite aggressive in entering an array of deals-from licensing arrangements for early-stage science through accessing later-stage compounds, such as a diabetes compound that we licensed from Kyorin-as well as targeted acquisitions.

PE: Such as?

Gilmartin: Since we last met, we acquired Sibia, a neurosciences company in San Diego, as well as Rosetta Inpharmatics, a specialist in gene expression analysis in the Seattle area, continuing our belief that, over the long term, genomics will be very important.

Gene expression analysis is a major advance as a drug discovery tool as well as a tool to gain insights into new disease pathways. You're looking at 25,000 genes on a chip simultaneously.

In the short run, it is an excellent technology for sorting through early-stage compounds to identify those that affect organ systems. In the longer run, of course, is the opportunity to see how gene interactions form a pathway to the disease.

PE: How do you go about evaluating those companies? Who's involved in that? Do you have a special office that looks at prospective partners?

Gilmartin: Ben Shapiro, who used to head basic research, is in charge of identifying and managing external research opportunities. His team includes Merck's licensing business development and financial experts from CFO Judy Lewent's organization. Ben also has access, through the research organization, to all of the scientific expertise he needs.

It's a highly effective way to operate. We started talking with Rosetta about the possibility of a licensing arrangement. In the course of those discussions, we came to understand that they were interested in moving further into drug discovery and saw that Merck would be an ideal partner to do that with. Therefore, they were available for a merger. The time between that moment of insight to the signed merger agreement was only two weeks. But, because of the effectiveness of the scientific team combined with the team of lawyers, financial people, and so on, it came without any loss of due diligence. That research tradition, by the way, which is characterized by rigorous analysis, extends throughout the entire company. The way we approach potential partners, we are sometimes a little difficult to deal with. But we can move very quickly, and we do a thorough job.

PE: What other ways are you keeping Merck on the leading edge in research?

Gilmartin: We are continuing the Merck tradition of bringing world-class scientists into the company at different levels of the organization. Peter Kim-a well respected scientist from MIT-joined us as number two in research. He recruited Dennis Choi, who is well recognized in the field of neuroscience. Along with the Rosetta acquisition came Stephen Friend, who is also a world-class researcher joining a very talented research team.

We also recognize the importance of being co-located where great science is being done. The Sibia acquisition put us close to the University of California at San Diego, where they are doing great work in the neurosciences. We had a research building on the drawing boards, but Sibia filled that need. We broke ground in Boston last year to be right in the center of the whole medical complex that includes MIT and Harvard.

We've continued to pursue breakthrough research to provide major advances in patient care, supplemented by major outcomes studies to demonstrate even greater value. We've also continued to reinforce our scientific capabilities, ensuring that we stay on the leading edge, with good timing, taking advantage of the continuing advances in, and knowledge from, genomics and expanding our reach through external relationships.

PE: You mentioned neuroscience. Do you consider that a particularly promising area right now?

Gilmartin: Absolutely. Once again, where we work is driven by where new knowledge and new insights are being generated. It represents a significant portion of our basic research budget. Just bringing someone of Dennis Choi's calibre into the organization is another indicator of how we continue to strengthen our in-house capability to pursue that.

Neuroscience is a field in which a lot of new knowledge and insight is being generated. It's one thing to identify a major unmet need, but it doesn't really serve any useful purpose to try to meet that need unless there's a way to go about doing it, with new knowledge of the disease pathways. So that drives the level of investment we're putting behind neuroscience research.

When Worlds Blend

Because cross-functional collaboration is one of Merck's key strategies, we ask Gilmartin for some details about how the company gets various functions to work together.

PE: You mention that your marketers are involved with R&D from the earliest stages. What kind of structure does it take to bring those and other functional groups into a productive relationship?

Gilmartin: On my management team, reporting to me are global research and manufacturing; the three marketing regions of the Americas, Europe/the Middle East/Africa, and Asia Pacific; vaccines; and the other corporate functions of finance, human resources, and general counsel. That's the structure.

To your point, one of the key things that we did as a management team, beginning in 1994, was to create mechanisms to integrate across those functions and across geography. Those relationships are important to making the policy and strategy decisions for the design of clinical trials.

For the drug development process, we have put together teams that allow marketing and manufacturing to work together much earlier than they had previously. That's because the kinds of studies you do when developing a product define the product, the label. It's crucial to have that kind of interaction.

Similarly, interaction between manufacturing, research, and marketing- when the time comes to scale up production and shape what the product will look like-is critical. So we have worldwide business strategy teams that are cross-functional for our existing franchises. We've been very conscious about having an integrated global strategy for our product positioning and the kinds of breakthrough labels that we're receiving from regulatory agencies around the world.

PE: In such a mixed brew of functions, how do you resolve differences and make decisions?

Gilmartin: We have a number of forums, such as one chaired by Ed Scolnick [executive vice-president of science and technology and president of Merck Research Laboratories] for resolving issues. There are always legitimate concerns with clinical development that require sorting through. There's a marketing forum where we can resolve issues that relate to how we're integrating our marketing strategies and positioning around the world.

If there's an internal "churn" going on, we encourage it to surface within this forum, where people can look at both the data and information all at once. Then we can make a decision.

The important thing is that, once the decision is made, it's really made, and everybody accepts it. It doesn't get revisited again and again.

PE: That must require considerable discipline.

Gilmartin: It requires a process of continual learning, because our goal is to keep the decision making at the lowest possible level in the organization, so we can move quickly and not create bottlenecks by pushing everything up to the top. But it's important to be clear that, if we can't easily resolve an issue-and often that's because it's complicated-we have mechanisms to get those surfaced and resolved.

Pressing Prices

Although Merck has done well leveraging its relationship with managed care, Gilmartin sees a gathering danger in the US public sector-an almost universal push by individual states to control or reduce the rapidly rising pharmaceuticals spend.

PE: How far will the states go to control pharma spending, and what are the potential consequences?

Gilmartin: The state-level trend is continuing toward supplemental rebates and a system that would look more and more like price controls-just mandated prices. If that's what we end up with over the long term, it will be quite detrimental to the industry.

That's the environment in which we compete in Europe. But the research is moving out of Europe to the United States, and the European Commission is trying to understand why innovation in the European industry is declining. It's pretty clear it's because of price controls. They're trying to seek a way out of that.

PE: How will such a trend in the United States affect Merck?

Gilmartin: It will create an environment that requires greater demonstration of outcomes. Medicines that represent significant advances in patient care will find their way onto formularies. Those that look more "me-too" will have a hard time, and it's going to get tougher.

The winning strategy in that environment is to provide breakthroughs and outcomes. But, under the category of operational excellence-our banner here-we continue to seek ways to improve the effectiveness of our company and how it functions, so we can fundamentally lower our cost structure.

We have several initiatives underway, some of which cut across how we do business internally around the world, such as how we are organized for processing our financial transactions, how we go about global purchasing, and how we think about our standardization of technologies, including information technology. A variety of activities are underway in each division, such as looking for more efficient ways for inside marketing and outside sales reps to interact, so we can reduce the levels of infrastructure.

PE: What do you think of Pfizer's arrangement with Florida? Do you think that represents one pathway for companies in the future, or is this just an experiment that needs to play itself out?

Gilmartin: It will be interesting to see how that turns out. Based on our experience with Medco, it's difficult to demonstrate or to document cost savings. Vaccines are clearly cost savers. With Cozaar, if you reduce a progression toward end-stage renal disease and reduce it by about 25 percent in Type 2 diabetics, and you avoid kidney dialysis, you can run the numbers and see that's a cost saving.

On the other hand, cholesterol lowering, which is important in terms of extending the quality of life, is cost-effective. Because of the level of incidence of cardiovascular events and the reductions achieved with medication, that medication is cost-effective and therefore, worth spending money on. But you won't be able to state you're saving money by getting people to use cholesterol-lowering drugs. It's very difficult to demonstrate.

I would prefer to see states take the direction that Nevada is taking. Nevada has, in effect, set up its own competition among health plans to deal with people who don't have adequate coverage, and to control costs. Using Medco as a model and watching how major clients interact with it, their plan sponsors want to make sure they're getting their money's worth.

PE: How do the sponsors-employers, mostly-calculate their benefit?

Gilmartin: If I'm paying for this benefit for my employees, I want to know if my employees are getting the right medicine at the right price and using it in the right way, and if they are really benefiting from it. I want to be assured that I'm getting a very competitive price from the pharmaceutical companies, and that the medicines are used properly.

But once I'm assured of that, I recognize that there are a whole series of new medicines, that cholesterol lowering is important for the health of my employees. And, although I can't make a savings in terms of less hospitalization, I'm sure that if I extend that calculation to include increased productivity, it will show a huge economic benefit to me.

So we don't sense at all that employers are trying to restrict pharmaceuticals, but they want to make sure that they're getting value for their healthcare dollars. Nevada said the best way to control its pharma spend and provide a benefit is to use health plans or PBMs to ensure that it is getting value. That's something that Medco would see as a business opportunity for the future, but it will require some reorientation in states' thinking to get there.

Battlefield Rules

The conversation turns to marketing ethics, the future of sales forces, the virtue of direct-to-consumer (DTC) advertising, and the current marketing parity among companies-leading to competitive advantage based on the products' value in patient care.

PE: What is your opinion of PhRMA's new voluntary guidelines for gifts to physicians?

Gilmartin: We welcome them. We are already there and have been all along. What they accomplished is to put greater specificity on how the American Medical Association (AMA) guidelines should be interpreted. But we think it's a major advance by the industry.

PE: Does the perceived need for those guidelines reflect a somewhat out-of-control situation with sales forces industrywide? Is it time to trim back?

Gilmartin: Sales representatives will continue to play a very important role. How the company uses reps is very important in ensuring that the time they spend with physicians is worth the investment.

So that implies the need for a much greater sophistication in marketing, and it requires a tighter link between the sales reps' execution and the marketing strategy. We have really focused on the efficient use of our sales reps, and we've seen excellent results from that.

PE: On the consumer side, how can DTC marketing complement professional marketing?

Gilmartin: Direct-to-consumer advertising continues to demonstrate that, when we have new treatments or underuse of treatments, it has value. It has value to patients because they act on that information and go see their doctor. Statistics from a Kaiser study show that about 30 percent of people who see DTC ads go to see their doctors. But more than half the time, the doctors give them nothing or something else.

So the doctor is still in charge. Doctors in our research report that they see the patients they should have seen.

Of course, doctors don't want to be surprised by a patient appearing and asking for something that they haven't had the opportunity to learn about beforehand. So that's an important element, because otherwise it's a wasted visit. Efficiency and appropriate use of sales reps, particularly in a tough economic environment, will become more important.

PE: That logic leads back to your emphasis on breakthrough research.

Gilmartin: The industry has been through some major eras, throughout which Merck has been consistent in emphasizing breakthrough research. But in the late '80s-one might characterize that as the era of major price increases-and then in the '90s, because of the impact of managed care and so on, the price increases disappeared. It became an era of major marketing and large sales forces, which are easily matched, so there's no sustainable competitive advantage there.

As we get into this decade, competitive advantage will come with advances in patient care, through breakthroughs in outcomes. We've always focused on that, and that's why we believe our approach will be successful.

PE: Through the pathway of genomics, ultimately?

Gilmartin: Merck has successfully stayed on the leading edge of each change, such as in the 1970s, moving into molecular biology, which paid off in the 1980s and 1990s. But then the focus of molecular biology went from DNA to RNA to a protein, and we had to deal with that. But we always looked at one thing at a time.

Peter Kim describes the next phase as essentially cracking a cell open and pouring the contents on the gene chip and looking at everything at once, finding the patterns that matter and the algorithms that explain why they matter. Early in this decade we'll probably see the impact of genomics in gene-expression analysis, enabling us to sort much more quickly through safety testing. But in the latter part of the decade, we will move into greater understanding of disease pathways.

PE: Will that still lead to an emphasis on selecting patient populations?

Gilmartin: It will lead to the design of clinical trials, in being able to identify patients who are most likely to benefit. But we don't go to the next step of thinking of designer drugs or how we fragment them for individuals. It could actually have the effect of increasing the use of medicines beyond the way they're used now and in broadening the patient population. Doctors would have the evidence that, if they treat a particular patient, that patient will respond.

PE: It's more about finding common denominators than finding super-selective phenotypes.

Gilmartin: Precisely.

PE: So, where will the trends and strategies you have described take Merck in the next five years?

Gilmartin: We will be filing 11 new compounds and launching some of them in that time frame. They all represent our strategy-pharmaceuticals based on new knowledge about the pathways of disease and therapies that provide significant advances in patient care for large populations worldwide.

It is a continuous strengthening of our research capability to ensure that we stay on the leading edge and are able to take advantage of the changes and advances in drug discovery technologies.