Merck's Medicine Man

By Gordon Bock

Most boys find their idols at political rallies, baseball stadiums or concert halls. When Pindaros Roy Vagelos was a teenager, he found his heroes at a luncheonette. In the late 1940s he mixed malteds and cleaned counters after school at Estelle's, the diner that his Greek immigrant family owned in Rahway, N.J. The town was, and still is, home to the laboratories of Merck, the giant pharmaceutical firm, and at lunchtime the company's research scientists often wandered into Estelle's, six blocks away. There Vagelos eavesdropped as the men who made Merck's miracle medicines talked about their work in the lab churning out such wondrous substances as penicillin and vitamin B-12. "They seemed to be leading a very exciting life," he would later recall.

Vagelos, 58, decided to make that life his own, and he succeeded beyond his greatest expectations. A local boy who made really good, he traded his apron for a doctor's smock at medical school, eventually joined Merck and by 1986 had become the company's chairman, president and chief executive officer. Under the spell of Vagelos' visionary vigor, the company has recovered from a tepid performance in the early 1980s to become the world's No. 1 prescription drugmaker. Though many Americans probably could not name a single Merck product, especially since its Sucrets sore-throat lozenge and Calgon bubble- bath brands were sold in 1977, physicians and pharmacists are very familiar with the company's 100 drugs, from antibiotics to anticholesterol pills. Merck's sales surged by 23% in 1987, to a record $5.1 billion, as profits ballooned by 34%, to $906.4 million.

While many U.S. companies grumble that they cannot compete in the tough global environment, Merck pulls in more than half its sales from overseas customers. At a time when much of corporate America is focused on the next quarter's bottom line, Merck plows a higher chunk of its revenues into research and development (11%) than any rival drug company. Right now it has 50 new medicines in the works. And while other corporate chieftains spend much < of their time prowling for acquisitions, Vagelos prefers to look inward, spurring the research effort, boosting productivity and instilling a keenly competitive spirit.

A giant white banner in Merck's campus-like Rahway headquarters reminds visitors that they have arrived at AMERICA'S MOST ADMIRED COMPANY, an accolade given the firm by a FORTUNE magazine survey in January. But Vagelos finds such praise unsettling. Says he: "You'll die if you sit on your laurels."

That is especially true in the risky, cutthroat pharmaceutical business, where the typical product costs about $125 million to bring from the laboratory to the pharmacy shelf. Although drug patents can last up to 22 years, firms must test a product for several years after a patent filing to win approval from the Food and Drug Administration. That gives competitors, who have access to the filing, time to tinker with a patented compound and make it different enough to qualify as a new drug. Growing, too, are the ranks of generic-drug producers who do little or no research and sell copies of older drugs at deep discounts. Their share of the $28.3 billion-a-year U.S. market for prescription drugs is likely to double by 1990, from $1 billion in 1987. Name-brand drugmakers like Merck must produce or perish.

Vagelos operates on the theory that one should succeed in business without really lying. In a field where inflated claims by sales representatives are notorious, he bars his 5,000 "detail men," as drug-industry salespeople are known, from making claims they cannot substantiate with scientific data. He also does not allow them to bad-mouth other companies' cheaper generic drugs.

Merck's drugs speak for themselves. An astounding 13 each rang up more than $100 million in 1987 sales, well ahead of Britain's Glaxo Holdings, which has five products in that rarefied range. Among Merck's best sellers are Vasotec, a blood pressure-lowering drug; the antibiotics Primaxin and Noroxin; Pepcid, used to treat peptic ulcers; the anti-inflammatories Clinoril and Indocin; an antiglaucoma agent named Timoptic; and the hepatitis fighter Recombivax HB, the first genetically engineered vaccine licensed for human use.

Perhaps the most wondrous of Merck's wonder drugs is its newest, a substance called lovastatin that lowers cholesterol levels in the body by up to 40% and is marketed under the brand name Mevacor. Its development illustrates how Merck achieves breakthroughs via a combination of dogged lab work, close cooperation with FDA officials and a painstaking preoccupation with the safety of potential patients.

Mevacor was no overnight phenomenon. In 1956 a team of Merck scientists discovered melavonic acid, a crucial chemical in the series of reactions that produce cholesterol. It was not until 1979, four years after Vagelos left his teaching post at Washington University in St. Louis to join Merck Labs as a high-ranking executive, that the company used new lab techniques he had suggested to build on that 23-year-old discovery and isolate lovastatin, which could inhibit the production of melavonic acid and block the buildup of cholesterol. Merck spent eight years assessing lovastatin's safety. By November 1986, when Merck sought FDA approval for what was then known as MK- 803, agency officials were already familiar with the details, because the company had kept them informed of the drug's progress every step of the way. FDA approval last August came after just nine months of review, instead of the usual 30 months.

For all its potential, Mevacor faces stiff competition. Lopid, a similar drug introduced in 1982 by Parke-Davis, had about 40% of the $190 million anticholesterol business when Mevacor appeared on druggists' shelves in September. Mevacor quickly grabbed a 33% share, trimming Lopid's to 20%. Then, in November, Parke-Davis came out with a study quantifying how Lopid dramatically cuts the risk of coronary heart disease. Lacking his own data, Vagelos refused to make similar assertions. By January the two drugs were running about even in sales. Analysts suggest, however, that once Merck has its own study in hand, the company's reputation could push Mevacor back in front, generating more than $1 billion in annual sales by 1992.

One undeniable drawback to Mevacor, at least from the patient's standpoint, is its high price. A single 20-mg pill goes for $1.64, and a year's treatment can cost up to $3,000. Says Congressman Henry Waxman, a California Democrat who chairs the House Health and Environment Subcommittee: "Merck, like other big drug companies, has been raising prices dramatically and has introduced new drugs at shockingly high prices." Even drugs whose patents have long expired remain expensive. A bottle of 60 25-mg tablets of Merck's arthritis- fighting Indocin sells in New York City for $28, vs. $12 for an equivalent generic brand.

For their part, Merck and other drugmakers say high prices generate the revenue needed for research, testing and development of new products. Much of that revenue, however, goes into heavy advertising and promotion aimed at getting doctors to remember the big companies' brand names at the expense of generics from smaller firms. Even Merck, which is heavily research oriented, spends more on advertising and promotion (an estimated $670 million last year) than it does on lab work ($560 million).

Yet behind all the puffery are genuine breakthroughs. When Vagelos joined Merck, the company was slogging through a slump in its product development. But he helped start a huge campaign that brought on board hundreds of new research scientists. That talent hunt continues to this day. As chief executive, Vagelos makes surprise visits to his divisions, asking managers, "Whom have you recruited recently? How are they coming along?" Another hallmark of the Vagelos style: a penchant for promoting promising employees several rungs at a time, building creative tension in the ranks.

Vagelos proves that corporate leaders can be straight shooters who are persuasive without being abrasive. To be sure, the trim, five-mile-a-day jogger, one of the few chief executives in the drug business with an M.D. degree (and a mere two weeks of business education from a Harvard seminar), is a demanding boss. "When the phone rings on a Sunday morning, you know it's Vagelos," says Edward Scolnick, president of Merck Labs. But the chairman also wins high marks for staying in touch with his staff. He keeps his spartan office open to any of his 32,000 employees with a complaint or a suggestion, and lunches in the company cafeteria, as do his top executives. The company supports a day-care center for employees' children, lets many workers choose their hours and regularly assigns senior managers to awareness-training courses to help them understand subordinates' family-related needs.

These days Vagelos is pushing his researchers to come up with the next generation of wonder drugs. In the testing stages: another cholesterol- lowering drug that could prove more potent and longer lasting than Mevacor; an anti-ulcer medication that has shown a high degree of effectiveness; MK- 538, a drug that holds promise of aiding diabetes sufferers. Merck will soon launch large-scale clinical trials for MK-906, which in preliminary tests shrank swollen prostate glands without bad side effects, alleviating a problem that vexes millions of men over 40. Other teams are studying cures for cataracts, arthritis, cancer and AIDS. But so are Merck's rivals. London-based Burroughs Wellcome last week won, as expected, the U.S. patent on use of the drug AZT against AIDS, thus giving the company an early lead in that market.

Such competition keeps Vagelos from becoming complacent. "I tend to discount immediately what we have accomplished," he says. "Once you know you have a drug or it is coming along, you really want to get on with the next thing. After all, what's more exciting than trying to do something that's never been done before?" The question is one that Vagelos never stops asking.

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Chart by Joe Lertola

CAPTION: PRESCRIPTION FOR PROFITS

DESCRIPTION: Merck net income, 1983-1987; Color illustration: bottle of pills.

With reporting by Raji Samghabadi/Rahway