The CEO's diagnosis may be the heart-starter the drug maker needs, writes Christopher Bowe
March 28, 2006
DICK Clark is on the A-list. The chief executive of Merck is receiving invitations from the US President, the UN Secretary-General, congressmen, senators, boards and councils. People now recognise him in public.
He suspected life would change after he became head of the US drug maker last May, but he never knew by how much.
Sitting in the modest chief executive's conference room in Merck's Frank Lloyd Wright-style headquarters in central New Jersey, Clark is a reluctant celebrity. He speaks quietly, and lowers his voice as the conversation touches on critical topics. He may have served as a lieutenant in the US Army in the early 1970s, but he appears uncomfortable under questioning.
"Whether they are different associations and boards or government officials, I underestimated tenfold the external demand that is placed on a CEO," he says.
The remark says much about the man charged with reviving a company that has fallen from grace following a series of missed targets, litigation over its withdrawn painkiller Vioxx and expiring patents on some of its high-earning drugs.
Throughout his career, Clark has been far from the limelight, working for 30 years in the mundane area of drug manufacturing and in Merck's low-margin former Medco unit, a manager of prescription drug benefits.
Now the corporate insider must put himself at centre stage if he is to overhaul Merck's culture and convince its 65,000 employees that change is essential.
"What we're trying to do is regain our leadership position in the pharmaceutical industry," says the 60-year-old Clark, who has spent most of his career at Merck.
"And the fact is culture eats strategy for lunch ... You can have a good strategy in place, but if you don't have the culture and the enabling systems that allow you to successfully implement that strategy ... the culture of the organisation will defeat the strategy."
In the early 1990s, Merck was the world's No1 drug maker and the envy of its rivals. But now it ranks a lowly eighth, far below companies it considered an afterthought a decade ago.
Merck admits it suffered from a culture of arrogance, particularly in its research arm and, with few blockbuster drugs in the pipeline, its business prospects have been dimming over the past five years. Earnings have either fallen or remained flat over that time, often disappointing Wall Street.
Meanwhile, it has scrambled to find new products to make up for the patent expiry in June of its biggest drug, Zocor, for cholesterol. In 2008 the patent expires on another big earner, the osteoporosis drug Fosamax.
Vioxx, too, has been a huge setback. Merck has been besieged by almost 10,000 lawsuits, potentially representing billions of dollars in liability, over the blockbuster drug that it withdrew in 2004 - after finding it increased the risk of heart problems.
These troubles hastened the retirement of Raymond Gilmartin, former chairman and chief executive, last May. But Clark's selection was not welcomed with applause on Wall Street. The appointment of the life-long company man was seen as proof that Merck's insular culture would not change, even in desperate times.
Clark counters that his experience has been vastly underestimated. His time in manufacturing, he says, gives him the skill of wringing efficiencies out of the business.
Further, his spell at Medco, which worked closely with other drug makers and therefore operated with a firewall between it and Merck, allowed him to see the parent company from the outside.
"If I didn't go through those combinations, if I didn't actually step outside of Merck and look back in, I don't think anybody in this company would've had the same intensity for change," Clark says.
So how does he plan to turn Merck around? The first step is a radical shift in culture, he says, from a change in the way employees work together to instilling greater accountability in every corner of the group.
Clark wants to create an aggressive, disciplined and efficient environment in a company regarded in industry circles as passive, prim and academic. Without such a shift, he believes, Merck will not change fast enough to deal with its own problems, never mind the growing pricing, governmental and regulatory challenges facing the sector.
"There's a little bit in the culture of 'this too shall pass'. And it's not passing, it still exists, and the environment is going to get much more intense," he says. "Our theme with our new strategic plan is a plan to win. We felt like we were trying not to lose, instead of trying to win."
Clark says that there have long been "enough signals" that Merck needed changing, including rumblings from Wall Street, pricing pressures and a slow reaction to intensifying government scrutiny. He believes "metrics" should have been in place at least five years ago to watch for "early warning signals" in the business.
He says Merck should have aggressively cut costs, particularly in its marketing arm, in the last five years. But the industry, not only Merck, came late to such cost consciousness, he adds.
Research could have been helped too, he says, as the increased requirement for productivity in research raised questions "whether we needed to bring in another wave of scientists and clinicians to help us".
The sales and marketing arm also lacked accountability for its actions. "You know we disappointed 'The Street' several times with our numbers and nothing happened to the commercial model. We didn't change how we were organised, or change leadership, or issues like that," he says.
Clark's mission began in September. Teams of employees were asked to present business cases to senior managers to test possible directions for the company, such as whether to build a generic drug business. The review concluded that Merck should remain a pure-play drug company. But Clark says the process was vital, as it showed the 200 senior executives that Merck would now operate in an atmosphere where assumptions could be openly questioned by anyone.
"The way we would potentially do it in the past was: 'Why aren't we in the generics business?' And the answer you'd get is: 'Well that's not the business we're in.' And people would give you a little laugh and a smirk," he says. "That's not a satisfying answer."
He has launched several initiatives to boost communication: he will brief employees around the world through webcasts; company strategy will be set out on a single sheet of paper; and a scorecard will be developed showing everything Merck needs to accomplish in 2006, with quarterly updates on both financial and strategic objectives.
He also plans to share this scorecard with investors in the hope of erasing what he calls Merck's "credibility gap" with Wall Street.
In drug research he will focus Merck on just nine disease areas instead of 32. Manufacturing operations will be restructured and Merck will rely more on technology instead of sales representation to market drugs. Six Sigma, a quality-control system, will be applied in research to speed drug development, and elsewhere in the company.
Clark has also changed the way the company sets its earnings projections. Formerly set by top managers, projections are now suggested by lower-level teams.
"It wasn't like Dick Clark said: 'We're going to have double-digit growth, go out and find it!' We tested it and tweaked it ... but it was legitimate and we believe in it, so let's go public with it. And that's the first time we'd done that as a company, ever," he says.
He has pledged at least 10 per cent compound annual earnings growth by 2010, helped by cost cuts and two crucial forthcoming products: Gardasil, a vaccine for cervical cancer, and Januvia, a diabetes drug.
Clark says the long-range target is "important to put a stake in the ground", believing the company needs to prove it could be held accountable by investors and employees.
Clark's strategy will determine his legacy. He turns 65, the company's retirement age, in March 2011. His last six years of service will make him either the hero of Merck or another scapegoat for its decline.
Outside the office, Clark's reading preferences include works on the American Civil War and Abraham Lincoln, whom he admires for his ability to succeed despite naysayers, rivals and unsupportive members of his own government.
His predicament differs, he says, since the company is rallying behind him. But outside, detractors remain.
If he succeeds, he will have the satisfaction of knowing he set Merck on a path to growth -- and making a cultural change that he hopes will be talked about 100 years hence.
"I hope they'll say: 'Remember back last century when Clark did that.' ... And if we do that, I think by 2010 you'll see an article, maybe in the FT, that says 'Merck is back'."