What went wrong with Gardasil

FORTUNE -- There's a liquid drug that women can get injected into a layer of muscle -- three separate times over a six-month period -- that can protect them from a kind of cancer. From a scientific perspective, that's amazing. In terms of public health, it's a breakthrough.

But four years after Merck (MRK, Fortune 500) released this would-be top-seller, called Gardasil, it has proven to be a marketplace dud. In Merck's second quarter, the company reported an 18% year-over-year drop in sales to $219 million and its stock is down nearly 3% to date. Analysts are pointing to Gardasil not as a savior, but as a risk for investors.

What happened?

The answer is complicated and carries lessons for both drug makers and investors. Gardasil ran into two major roadblocks: consumer inertia and politics. The science, and market demand -- two areas that have tripped up drug makers in the past -- weren't issues. "The awareness went out pretty quickly as to what this was and what they accomplished," says Bert Hazlett, an analyst at BMO Capital Markets.

First, the science: human papilloma virus, or HPV, is an incredibly common sexually transmitted disease. There are over 100 different strains of the virus, most of which the body can fight off without any symptoms. But some it can't. Two of these strains cause about 70% of cervical cancers in women.

In 1991, a student of the German scientist who won a Nobel for linking HPV and cervical cancer started working with a partner to get an HPV vaccine they'd developed to market. Merck and GlaxoSmithKline (GSK) bit. Merck's Gardasil protected women against four high-risk strains of HPV. It hit the market in 2006, before GlaxoSmithKline could come out with a similar product, called Cervarix, three years later.

Analysts predicted that Gardasil would take off. And it did. Briefly. Gardasil grossed over $1.1 billion within nine months of hitting the market, Merck had distributed 13 million doses of the vaccine, and it had been approved in 86 countries.

And that was the end of the rocket ride. Since then, Gardasil sales have been flat or declining, with analysts expecting the drug to pull in $1 billion in sales for years to come. That kind of annuity may be fine in some industries, but drug makers need big hits to make up for lab disappointments.

The main problem with Gardasil seems to be the equivalent of a design flaw. To be completely immunized, women have to get a series of three shots over six months. Many women don't.

An analyst brought up the issue of following through with the shot series during the 2007 third quarter report. Merck CEO Dick Clark said that the company was addressing the problem:

"We have put in place substantial reminder programs that allow them to improve the ability to remember to go back to the second and third dose. So, we're doing it by mail, we're doing it by e-mail, we're doing it by text messages, and a variety of different technologies to be able to make sure [that] they get to their second, and third doses."

Turns out, drug reminders don't work well in a technology better suited for LOL. The Centers for Disease Control reported in late August that while 44% of teenagers received the HPV vaccine in 2009, only 27% of them received all three doses of the shot. Unfortunately, there isn't evidence to support that getting only one shot effectively protects against cancer. So why aren't women finishing the series?

1) People are spending less on medicine in general.

The growth rate of annual spending per person on health care in the United States has decreased since 2004, according to the Bureau of Economic Analysis. Three shots of Gardasil cost just under $400 dollars, about three to four times as much as MMR booster shots. Because children aren't required to get Gardasil for school, like MMR vaccines, parents can opt out.

2) Some parents aren't comfortable vaccinating young children against a virus they can only get from having sex.

In 2007, when Texas governor Rick Perry issued an executive order that all girls entering the 6th grade would receive Gardasil, parents were furious. Some argued that the vaccine would promote promiscuity. The order was eventually overturned.

3) Merck didn't properly prepare the right doctors.

When Gardasil came out, Merck marketed it to college-age women. This meant that physicians talking to patients about Gardasil were typically gynecologists, not pediatricians. "When you think about those OBGYNs who tend to be the primary physicians for the 19-26 year old group, they're not vaccinators," says Anthony Butler, a pharmaceutical analyst at Barclays.

4) Merck couldn't counter the bad press.

In 2008, the New York Post published an article about a woman whose daughter died after getting the series of shots. No one linked Gardasil to the cause of death, but the drug was launched into the fierce debate over vaccine safety.

Large public health organizations still see a future for the drug. Now, the American College of Obstetricians and Gynecologists has supported vaccinating younger girls, down to age 11 and 12. The CDC says the drug is safe and effective and doing well - from a health point of view, if not a financial one. "HPV vaccine uptake is similar or better than that of other adolescent vaccines in the first few years after vaccine introduction," said Dr. Lauri Markowitz, an HPV expert at the CDC.

Merck is still pushing into other markets. The company is looking for approval of Gardasil in women of different age groups, and got the drug approved in 2009 for use in men, to prevent them from carrying cancer-causing strains or getting genital warts caused by HPV. The company has also just signed a deal with Chinese pharmaceutical company Sinopharm to try to sell products, including an HPV vaccine, in China.

But a full comeback seems unlikely. "Unjustified fears have affected the product," says Hazlett, "and they are fighting a tough battle to reinvigorate the franchise. From an investment perspective, we're not really banking on something like that happening."

Gardasil now faces competition from GSK's Cervarix, which was approved in 2009. If that drug, which also requires a three-shot regimen, penetrates the market in a way that Gardasil couldn't, then perhaps bad timing and bad press are to blame. But if Cervarix falters, then the problem could be that treatment requires multiple shots. Or, maybe people just aren't ready for a cancer vaccine when it's for a sexually transmitted disease.