Merck, the Portfolio Model and Pharma

Merck developed a reputation in the past few decades of being a science-driven company. My own personal experience can attest to that fact. When I approached the company at a recent career fair for marketing work, the company representative I spoke with handed my resume back to me when he saw that I did not have a science degree. Reading in Slywotzky’s book, Demand, about the history of Merck under CEO Roy Vagelos helped me to better understand why this happened to me and how science defines the culture of the company. Much like programmers at Google or Microsoft carry the most sway and influence, scientists at Merck were given the most encouragement and came to define the company’s culture.

Author of over 100 research papers, Vagelos came from a science background himself (NIH) and wanted to streamline and focus research efforts at Merck. To this end, he harnessed innovation and encouraged researchers to work towards common goals. This helped to refashion the organization around targeted therapeutic areas with great patient demand. This focus also helped to motivate all Merck employees resulting in a portfolio of drugs that were leading edge and blockbusters.

My summer internship at Abbott Labs provided an interesting contrast to the Merck portfolio model. Many drug companies, including AstraZeneca, have adopted the portfolio model in terms of focusing their R&D and commercialization efforts around certain therapeutic areas and specific diseases. This guiding principle seems to be standard practice in the industry at this point. What differentiated Abbott was their diversification across product categories to include diagnostics, baby formula and other nutrition products; insulin meters for diabetes and eye care products. Abbott was a portfolio of healthcare products -not just drugs. In contrast to Merck’s Vagelos who was an NIH scientist prior to his tenure at Merck, Miles White, the CEO of Abbott rose up through the ranks of the company from pharmaceutical sales. As one would expect, Abbott’s marketing and sales staff defined the culture of the company –not necessarily its scientists.

Abbott is not alone. Pfizer is highly skewed towards marketing and is often considered a strategic marketing machine as opposed to a research company. An interesting wrinkle in the contrast of Abbott was that its pharmaceutical business was dominated by one large blockbuster drug, Humira. Humira pulls in $2-3bil per quarter in revenues for Abbott. This drug was so successful that it was overshadowing all products within the Abbott family –not just the other Abbott drugs.

The problem with the blockbuster drug model, which is a key aspect of the model that Merck created under Vagelos, is that it tends to put all of the company’s eggs in one basket. Bringing promising research to market is never a sure thing and drug companies have become over-dependent on blockbuster drugs at the expense of potential drugs that could treat smaller patient populations. When these blockbuster drugs loose their patent protection, sizable revenue streams dry up instantly, making a drug company only as strong as its pipeline. This is also known as the patent cliff. Merck does not currently have a drug within the top ten blockbusters. Due to the risk profile associated with a weak pipeline combined with the dominance of its portfolio by one blockbuster, Humira, Abbott split-off its drug division in January, calling it AbbVie. It’s hard to imagine something like this happening at Merck. Science and the drugs that its robust R&D efforts generate are the hallmark Merck.

Many across the pharmaceutical industry perceive Merck to be the most science-driven company and they respect it for its culture. The irony is that Vioxx put a huge dent in the industry and Merck in particular. When there is so much drive and cultural weight behind the success of one drug, safety concerns can be overlooked. This is what happened to Merck with Vioxx and the recall of the drug caused irreparable damage to the company. It makes sense then that Merck acquired Schering-Plough in 2009 in order to diversify its portfolio and have more healthcare products in the mix with its pharmaceutical business. According to Chemical & Engineering News:

“The planned purchase is a major change of course for Merck, which long maintained that its own science-driven culture was sufficient to create strong sales growth.” 

Vagelos set the stage for the golden age of pharmaceutical growth and profits. What Vangelos did was harness the vagaries of research to strategically align the company around the common goal of bringing successful products to market. NPR argued last year that this has resulted in a generic drugs windfall which consumers should be thankful for. By building a culture around his vision and treating the FDA with care and attention, Vagelos designed a model that all companies copied. Merck has stood apart, however, through its focus on a scientist culture. I would venture to say that this scientist culture comes at the expense of understanding the marketplace and customer.

“Certainly, Merck has a reputation for being a business built on scientific achievement and servicing public health. ‘Pfizer is more market-drivenIn a lot of ways Merck is very concerned about how they’re perceived by the medical community,’ says Al Rauch, analyst for A.G. Edwards. And that intense focus on physicians’ perceptions may have come at the expense of investors’ impressions, experts say. (BusinessWeek 2004)”

As treatments proliferate and competitors roll out similar drugs, marketing prowess and business strategy become more important to the

success of your drug.  That said; Merck’s long-term strategy of plowing a high percentage of its revenues back into R&D is smart. It will feed the pipeline and enable the company to maintain its run of successful drugs.

As a marketer first and a scientist barely, my approach with drug companies and job hunting has been cautious. I have realized that networking directly with marketers at drug and biotech companies has been the best tactic. I have also identified companies that, like Merck, are dominated by scientists even within marketing. These companies, like Genentech, are a tougher sell for me as job seeker.

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