For decades, Merck & Co.'s research laboratories pioneered many of the world's best-selling drugs, ranging from lifesaving vaccines to treatments for blood pressure, high cholesterol and AIDS. The company's scientists considered themselves the best in the industry -- a pride that often came across as arrogance.
These days, Merck's scientists swallow their pride under research chief Peter Kim, who spent most of his career in academia. Dr. Kim took over amid a string of drug-development failures at Merck and has made it clear he thinks the company's own labs aren't sufficient to replenish its pipeline. He says Merck needs to turn to other companies, both for new drugs and new means of discovering them.
"Merck has outstanding science and scientists -- and it did when I came," says Dr. Kim. But, "in some areas, I knew that there were some scientists on the outside who were better."
Dr. Kim has hired other outsiders for top posts. Staffers have undergone training to improve their interpersonal skills when dealing with outside scientists. Some have reacted with anger to the initiatives and jumped ship. Adding to the tumult in the labs was Merck's September 2004 withdrawal of Vioxx, the painkiller linked to heart attacks and strokes.
Whether Dr. Kim succeeds will not only sway the fate of an American corporate icon but also serve as a barometer of the pharmaceutical industry's struggle to stay relevant in medical research. Merck's strategy is common in the industry: Many big companies with aging blockbusters have turned to biotech firms and smaller drug makers to refill their pipelines.
Merck has been as aggressive as any in courting partners. In 1999, it entered into only 10 outside alliances. In the three years since Dr. Kim's appointment to head Merck's labs, the company has signed 141 such deals, an average of 47 a year. Last year, it reviewed more than 5,000 potential partnership opportunities.
There are major potential pitfalls to Dr. Kim's strategy. Other companies' research can be of variable quality. Several of Merck's recent deals have quickly fallen apart when the drugs it licensed failed to show efficacy or had safety issues. Moreover, the competition to license compounds has driven up prices.
But Dr. Kim faces pressing deadlines. Merck's top seller, the $4 billion-a-year cholesterol drug Zocor, loses patent protection this month. Osteoporosis treatment Fosamax, another big seller, faces generic competition in 2008. And in 2010 and 2012, another two major drugs will lose patent protection in a cascade of revenue losses that Merrill Lynch analyst David Risinger has called Merck's "even-year curse."
Raymond Gilmartin stepped down last year as Merck's chief executive, 10 months before his scheduled retirement, and was succeeded by Richard Clark, who had headed manufacturing.
Merck is still highly profitable: It posted net income of $4.6 billion last year on revenue of $22 billion and expects similar net income this year. The company has had a few successes of late. In the past four months, the Food and Drug Administration has approved two new Merck vaccines. Thursday the agency is expected to approve Gardasil, a vaccine against a virus that causes cervical cancer. The good news has helped Merck's stock price recover somewhat from its low after the Vioxx withdrawal. But the three vaccines are likely to fall billions of dollars short of making up for the patent expirations.
Moreover, Merck is still struggling with Vioxx fallout. More than 11,000 lawsuits have been filed and Merck's liability is projected at between $4 billion and $30 billion. It was Dr. Kim who recommended withdrawing the drug after he saw study data showing its cardiovascular risk. He has taken a backseat role in court proceedings, in part because he wasn't at the company when Vioxx went on the market in 1999.
The 48-year-old Dr. Kim, who holds a Ph.D. in biochemistry from Stanford University, came to Merck with a top academic reputation but without experience in commercial drug development. Dr. Kim spent 15 years at the Whitehead Institute for Biomedical Research in Cambridge, Mass., and taught biology at the Massachusetts Institute of Technology.
Dr. Kim stood out for his "enormous ambition," says Gerald Fink, his former boss at Whitehead. The young scientist quickly decided he would figure out how the flu virus infects healthy cells, even though "elders in the field had come to consider it as an intractable problem," says Dr. Fink. Dr. Kim later discovered that proteins on the surface of the virus change shape to fuse with cell membranes, allowing the virus to enter the cell.
That discovery and subsequent research into the AIDS virus brought Dr. Kim to the attention of Merck's longtime research chief, Edward Scolnick. In late 2000, Dr. Scolnick took Dr. Kim to a Baskin-Robbins ice-cream shop outside Boston crowded with Brownie Girl Scouts. Speaking above the chatter, Dr. Scolnick made an offer that surprised Dr. Kim: He wanted the younger man to be his successor.
The offer was a classic shoot-from-the-hip move by the temperamental Dr. Scolnick. Three people familiar with Merck labs say Dr. Scolnick's heir apparent had been Roger Perlmutter, a former University of Washington immunologist who was then his second-in-command. But Dr. Scolnick and Dr. Perlmutter had a falling-out, these people say.
Dr. Perlmutter quit shortly after the approach to Dr. Kim and became head of research at Amgen Inc., a biotech company that has grown to have a higher market value than Merck. Half a dozen Merck researchers followed Dr. Perlmutter to Amgen. Through an Amgen spokeswoman, Dr. Perlmutter says he left Merck for a number of reasons and wouldn't confirm any rift with Dr. Scolnick. In an email, Dr. Scolnick denied having a falling-out with Dr. Perlmutter and declined to discuss his succession further.
Dr. Kim joined Merck in February 2001 and formally succeeded Dr. Scolnick two years later. His previous job at the Whitehead Institute had involved managing only about 35 people. At Merck, he was thrust to the top of an organization with 10,000 employees.
Dr. Kim says he was drawn to Merck by its "aura of excellence." But he says he quickly realized that Merck's research culture had become too insular. "A quote I heard a lot was: 'Well, that's not how we do things at Merck,' " he recalls. "My answer would be: 'OK, but that doesn't necessarily make it the best way to do things.' "
With Dr. Kim's approval, Merv Turner, Merck's head of licensing, commissioned surveys about how biotech firms ranked Merck as a potential partner. Merck scored poorly. Dr. Kim says words like "arrogant" came up a lot in the survey responses.
To reverse that image, Dr. Turner designed a slide presentation on how Merck scientists should behave with prospective partners. One slide explained that smaller biotech companies are "sensitive to unequal power issues & loss of control." Another counseled approaching meetings "in an atmosphere of courtesy and respect" and added: "Avoid putting them on the defensive."
Says Dr. Turner: "We sent our guys to charm school."
Tuan Ha-Ngoc, chief executive of Aveo Pharmaceuticals Inc., a small company that researches cancer treatments, noticed the improvement. When he met Merck scientists in earlier years, they asked questions "almost like a deposition," he says. "Not 100 percent hostile, but not a warm feeling." In 2003, Merck approached him about a research collaboration -- and, he says, showed respect for Aveo's scientific acumen. He signed on to a deal valued at as much as $100 million.
Actelion Ltd., a Swiss drug company, received Dr. Kim's royal treatment. Actelion had succeeded in making a type of drug for high blood pressure that Merck had unsuccessfully worked on for years. Actelion pitched Merck under Dr. Scolnick but got no response, and was on the verge of signing a licensing deal with another big pharmaceutical company.
Dr. Kim hopped on a Merck corporate jet to Switzerland and spent the day with Actelion's scientists. "It's the first time I've seen the head of research at a big pharmaceutical company take a plane and show up in a matter of days," says Jean-Paul Clozel, Actelion's CEO. "Usually, what you hear is: 'I have a window of availability for an appointment in a few months.' " Dr. Kim and Dr. Clozel capped the day with a dinner at an upscale restaurant in Basel.
A few months later, Actelion and Merck announced an alliance. "If Peter Kim hadn't made that trip, we would have gone with the other offer," Dr. Clozel says.
Back home, some Merck scientists became resentful that Dr. Kim, who had never himself developed a drug, was telling them how to go about their business.
Soon after he arrived, he angered Emilio Emini, Merck's senior vice president of vaccine research. During his 20 years at the company, Dr. Emini had done some seminal AIDS work. Dr. Kim wanted to hire another accomplished but controversial AIDS researcher, David Ho, to oversee him. Dr. Emini strongly objected, and Dr. Ho ended up not coming to Merck. But the episode strained the relationship between Dr. Kim and Dr. Emini, according to people familiar with the matter. Dr. Emini left Merck in early 2004. He now works for rival Wyeth. He declined to comment.
Veteran Merck research managers such as Kathrin Jansen, who was instrumental in the development of Gardasil, and Scott Reines, a top researcher in psychiatric diseases, also took jobs at other pharmaceutical companies. Dr. Kim won't comment on specific defections, but says: "When you're in a really good place, people are always going to try to recruit your scientists."
Dr. Kim hired other academic scientists who enjoyed good reputations but, like him, had never developed a drug. Among them was Stephen Friend, a cancer researcher who knew Dr. Kim from Whitehead.
Dr. Friend says he too was surprised to find that "the not-invented-here syndrome was rampant" at Merck. When other companies came to make presentations about their research, "the reaction was: 'How does this relate to what we're doing at Merck?' " he says. "There was an inability to look at reality if it hadn't been thought up at Merck."
Merck researchers were also inefficient, Dr. Friend says. They spent hours checking and rechecking their work for minor errors, he says. One of Dr. Friend's early moves was to scrap a version of the human-genome map Merck had needlessly developed in-house and use the more up-to-date publicly available version.
Dr. Friend's recruitment to Merck was the result of one of Dr. Kim's biggest gambles: the May 2001 acquisition of Rosetta Inpharmatics Inc., a small company based near Seattle, for $620 million. Rosetta's chief executive was Dr. Friend. Merck paid an 82 percent premium over the previous day's closing share price for the company, which uses powerful computers and other technology to look for genes that cause diabetes, cancer and other conditions.
Rosetta has yet to produce a drug that is close to making it to market. Drs. Kim and Friend say it is too early for that because the average drug takes more than 10 years to develop. They say Rosetta has already made a major contribution by identifying whether drugs under consideration are activating genes in a harmful way, making them likely to cause side effects in human tests. Merck has saved hundreds of millions of dollars by stopping the development of compounds in which Rosetta's technology detected flaws, they say.
As of February, Merck had 52 compounds in human testing, up from 16 in December 2002. Dr. Friend says Rosetta helped identify 10 of the 52. Another 11 were the result of other licensing deals, alliances or acquisitions. Eight are cancer compounds, a lucrative therapeutic area in which Merck hasn't developed a new drug since the 1960s.
"I'm greatly encouraged but not declaring victory," Dr. Kim says.
Forty-six of the 52 compounds in human testing are in the first two of the three phases of development, where failure rates are high. Of the 18 middle-phase drugs Merck disclosed as of Feb. 15, 2005, eight were terminated within a year, though it brought 11 new candidates into the middle phase during that time.
Several of Merck's partnership deals have already flopped. It paid Bristol-Myers Squibb Co. $100 million upfront in 2004 for rights to co-market a diabetes pill called Pargluva. A year later, the FDA declined to approve it, citing cardiovascular side effects, and the drug was killed.
"This is a high-risk business and you have to place your bets," Dr. Kim says. "Sometimes you're going to lose."
Merck courted Nastech Pharmaceutical Co. aggressively after the small firm presented results of an early study of a nasal spray to treat obesity at a conference in Florida in October 2003. The study showed users consumed 30 percent fewer calories at a lunch buffet than those who didn't use the spray.
Steven Quay, Nastech's chief executive, says Merck edged out two other big pharmaceutical companies by offering lucrative terms. However, Merck ended the partnership in March after it failed to replicate Nastech's earlier findings. Nastech and Merck disagreed on the dosage Merck used in its study, according to people familiar with the matter.
Dr. Quay says Merck's Vioxx crisis, which began a few days after they signed their partnership in 2004, led Merck to become more risk-averse. Dr. Kim denies that. "We're still being aggressive," he says.