Merck's New Prescription
By John Simons

(FORTUNE Magazine) – With all the headlines focused on Merck's Vioxx litigation, it's easy to forget that the company faces significant challenges in the business of actual drugmaking. Next month, at a Dec. 15 analysts' meeting in New York City, Merck's new CEO, Richard Clark, is slated to unveil his closely held strategy for reviving the world's fifth-largest pharmaceutical firm. Clark won't discuss the plan, which he calls the "road map," but insiders say it will steer Merck over some rough and unfamiliar terrain.

Merck's main problem: Some of the company's bestselling medicines are nearing patent expiration, and its pipeline of future products is blockbuster-free. Merck's biggest seller, the cholesterol medicine Zocor, will begin to face generic competition next June, potentially erasing the drug's $5.2 billion in annual sales. And in 2008 the company's $3.2 billion osteoporosis treatment, Fosamax, faces a similar fate. In all, roughly half of Merck's projected 2005 revenues of $22 billion will be exposed to generic competition over the next five years.

Since taking over last May, Clark has embarked on a top-to-bottom review of the company's finances. His road map, say company sources, will involve a severe round of cost cutting and layoffs as well as a complete restructuring of the sales and marketing unit. Perhaps the most austere portion of Clark's plan will involve reining in research costs and cutting unproductive programs. Clark is expected to sharply narrow the scope of Merck's research and development for the first time in the company's history. He is likely to discontinue areas of research where Merck holds fewer patented chemical compounds, such as psychiatric diseases, obesity, and sleep disorders. It won't be easy to simultaneously restructure the sales force while introducing new products. Clearing out labs while demanding that remaining scientists be more productive will be challenging too.

There's reassuring news, however, for shareholders who continue to stick with the company in the post-Vioxx era: Clark is adamant about preserving Merck's roughly 5% dividend yield (a $3.3 billion annual payout), still the most generous in the U.S. drug sector.