* Olivia Williams, Anne-Marie Jacks. Jim Davis. Sabrina Martinez, prepared this case under the supervision of Professor Allan Afuah as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Proprietary data have been disguised, but key relationships are preserved. The authors have taken poetic license with the characterizations made in the setting of the introduction.

Case 11: Merck(B): Zocor *

The grim mood in the main conference room was in sharp contrast to the festive Christmas decorations in Merck World headquarters in Whitehouse Station, NJ. Spirits were dampened in late 1995 as senior staff members debriefed CEO Ray Gilmartin on the newly released study conducted by competitor Bristol Myers Squibb. The study touted some impressive results for Bristol’s cholesterol reducing agent, Pravachol, and chances were, this would be bad news for Merck’s similar drugs Mevacor and Zocor. After being briefed on the potential impact of the study, Gilmartin had to contemplate future strategies, not only for Mevacor and Zocor, but also for all of Merck. How would Merck respond to new elements in the pharmaceutical industry to maintain the excellent performance it had enjoyed for so long?

Gilmartin as CEO

When Merck announced that Ray Gilmartin had been selected to replace retiring CEO Roy Vagelos, many were surprised. Many believed that Merck President Richard Markham was the natural choice to replace Vagelos as CEO, but he unexpectedly announced in1993 that he was leaving Merck after only 11 months with the company. The departure of two other key executives took the search for Vagelos' successor outside the walls of Merck. Prior to joining Merck, Gilmartin had served as CEO of Becton Dickinson, a producer of various medical products such as syringes, intravenous catheters and blood collecting equipment. Upon taking over, Gilmartin vowed to remain "dedicated to (Merck's) basic mission of discovering, developing and marketing innovative and cost effective medicines."


The history of Zocor

Mevacor, Zocor, and Pravachol are all members of the HMG Co A reductase enzyme inhibitor family of cholesterol-reducing drugs. In the liver (which produces 70% of the body’s cholesterol), the HMG Co A reductase enzyme converts Acteyl Co A to mevalonic acid, and mevalonic acid is subsequently converted into cholesterol. These drugs work to reduce cholesterol by inhibiting the HMG Co A reductase enzyme from converting Acetyl Co A to mevalonic acid, thereby curtailing the overall production of cholesterol.

Pravachol is based on the first reductase inhibitor, compactin, which was isolated from yeast cultures in 1976 by Akira Endo in Sankyo, Japan. Mevacor was isolated by Merck researchers in February, 1979 from a strain of the fungal microorganism Aspergillus terreus. Zocor, essentially a more potent form of Mevacor, was derived synthetically from a fermentation product of Aspergillus terreus.

Mevacor was FDA approved and released in September of 1987. Pravachol was FDA approved in October of 1991, and Zocor was FDA approved in December of 1991. Zocor was launched in the United States in January of 1992. It had been available in some places outside of the US since 1988. By 1995, Zocor had been prescribed for 3.1 million patients worldwide with nearly 1 million of those patients being Americans. Zocor recorded sales of $700 million in 1992 and $900 million in 1993. (Exhibit 1)


Impact of 4S

Even though Zocor was not a radical departure from Mevacor, it was still considered innovative by how Merck was able to market the drug (Exhibit 2). Merck sponsored a large scale project, the Scandinavian Simvastatin Survival Study (4S) which was the first clinical trial to demonstrate conclusively that long-term therapy with Zocor can reduce the recurrence of heart attacks. This study followed 4,444 patients with coronary heart disease (CHD) and elevated cholesterol levels for a median of 5.4 years. The study showed that Zocor reduced the risk of mortality by 30% and the risk of hospital-verified non-fatal myocardial infarction by 37%. It led to mean reductions in total cholesterol, low-density lipoprotein cholesterol (LDL), and triglycerides by 25%, 35%, and 10% respectively, and a mean increase in high-density lipoprotein cholesterol (HDL) of 8%. The study concluded that treatment with Zocor in conjunction with proper diet and exercise reduces death from heart disease by 42%, resulting in 30 fewer deaths from any cause over 5 years. It also reduces the risk of heart attack and surgical procedures thus adding cost efficiencies to its list of benefits.


Sales results for Zocor after 4S

Zocor's popularity grew in 1995 after the FDA approved it as a product to save lives and to prevent heart disease in patients who already suffered a heart attack (the 4S study). It is estimated that new prescription sales of Zocor rose 80% to $460 million in the first 9 months of 1995 following the release of this study. In 1996, sales growth was expected to continue to increase.

The positive impact of the 4S on Zocor's sales was the main cause of concern as Merck executives considered the results of the Pravachol study. While the 4S allowed Zocor to claim that it saved lives and prevented heart disease in post heart attack patients, the study conducted by Bristol Myers Squibb using its product, Pravachol, was conducted on pre-heart attack patients with high levels of cholesterol. It allows Bristol Myers Squibb to claim that Pravachol can prevent first time heart attacks and angina in those patients with elevated cholesterol levels (Exhibit 3). The significance of this distinction was enormous. In 1995, there were fewer post heart attack patients with high cholesterol than there were patients with high levels of cholesterol who had not suffered a heart attack.

Ironically, with the differences between Zocor and Pravachol so small, it is likely that Zocor would be as effective in primary heart attack prevention as Pravachol was. Even more ironic, Merck had actually considered a proposal to conduct a study similar to the Pravachol one in 1987, but chose not to citing financial constraints. Instead, Merck committed to the 4S. By not conducting a study similar to the one Bristol Myers Squibb conducted for its product, Pravachol, Merck left the opportunity open for competitors to establish a significant market presence. While the 4S proved effective for the marketing of Zocor, one can only estimate the impact that both studies would have had for the drug.



Beyond the direct competition Merck faced with Pravachol, there were other trends in the pharmaceutical industry that were changing the face of competition.

Me-Too Drugs

The similarities between Mevacor, Zocor, and Pravachol are a prime example of "me-too" drugs. These drugs constitute virtual replicas of proven blockbuster drugs on the market. While there were some first-mover advantages, these "me-too" drugs allowed competitors to cash in on a market that first mover had created. The proven profitability of certain agents meant that firms could more quickly generate much needed cash to fund increasingly expensive product development efforts. The fundamental implication of me-too drugs was to change the basis of competition from a focus on good science to a focus on good marketing. The efficacy of a drug was not necessarily the primary factor for market success. Pharmaceutical firms now had to rely on differentiating their version of a particular compound from all of the other "me too" drugs available in the market.

One of the first ways to create this differentiation was the field research that the company performed. In the case of the HMG Co A reductase inhibitors, research done by Merck allowed Zocor to claim secondary heart attack prevention while the Bristol Myers Squibb study would position Pravachol as primary prevention for heart attacks. Advertisements quickly became a powerful tool for educating physicians who could not rely on out-dated reference texts or time consuming seminars.

A second way to differentiate was, not surprisingly, in the pricing. In April of 1994, another "me-too" drug for lowering cholesterol was introduced by Sandoz Pharmaceutical. Leschol entered the reductase inhibiting cholesterol drug market with a wholesale cost that was significantly lower than the other drugs in its class.


Wholesale price for 30 tablet supply

Drug 20 mg 40 mg
Mevacor $60.00 $107.70
Zocor $54.00 $97.80
Pravachol $54.00 $91.20
Leschol $30.60 $34.20

Source: New drug takes on competition, Business Dateline, March 24, 1994

These much lower prices, combined with competitors attempts to down play Leschol's effectiveness, created a good deal of publicity and possibly fueled sales of the Sandoz product. In fact Leschol earned 60% more prescriptions in its first year than Zocor had. The market for cholesterol-lowering drugs grew 20% in the first year after Leschol's launch. Two months after Leschol was released, Merck revealed that it was cutting the price of Mevacor and Zocor by as much as 32% even though it was raising prices on many of its other drugs. Merck maintained that the price reductions were not related to the introduction of Leschol.

Finally, "me-too" drugs were dependent on "pull" marketing techniques that were very new to the pharmaceutical industry. While pharmaceutical ads historically were used to help inform doctors of the applications of drugs, new ads were now being directed towards the end-user, the patient. Such ads encouraged readers to "ask your doctor" about the drug. In doing so, the pharmaceutical companies created consumer demand for their products. This new trend to pull products through required drug makers to develop direct relationships with end-users as well as with doctors and pharmacists. The increasing importance of marketing in this traditionally research-oriented industry would call for large organization realignment and a re-structuring of efforts.


Vertical Integration

In the early 1990's, the Clinton administration was driving for massive healthcare reform efforts that threatened the profitability of the pharmaceutical industry. To prepare for such reforms, Merck took defensive measures in 1993. It vertically integrated by purchasing one of the best known and most powerful prescription benefits management company (PBM), Medco. Merck paid well over $6 billion for Medco, which many analysts believed was more than it was worth. Keenly aware of the threat that this move represented to them, other pharmaceuticals were not to be outdone. SmithKline Beecham quickly bought Diversified and Eli Lilly & Company purchased PCS Health Systems.

By controlling the PBM, Merck now had control over the distribution side of the value chain. The power of the PBMs rested in their ability to make recommendations to pharmacists. For example, in 1992 Medco had entered into an agreement with Bristol-Myers Squibb in order to recommend that pharmacists switch patients from Mevacor to Pravachol. Pravachol sales quickly rose by 35%. Later, it was learned that Medco had made this agreement with Bristol in an effort to demonstrate to Merck the control that they actually had over the distribution of these drugs. Medco’s actions were done in an effort to encourage Merck to acquire them at a premium price. The strategy worked when Merck realized the impact that Medco was making on the sales of Mevacor. They quickly purchased Medco in 1993. Then, in 1993, after the acquisition, Medco switched back to recommending the Merck products. Conversely, Bristol Myers Squibb steadfastly refused to join in the vertical integration frenzy, noting it had no experience, and therefore, no reason to enter this business.

In retrospect, knowing that health care reform did not have the enormous impact everyone thought it would, it is perhaps easy to agree with the analysts who had, at the time, questioned the purchase of these PBMs. Furthermore, defensive practices taken on by the pharmaceutical company owners of the PBMs attracted some negative attention from congressional investigators. The practice of dropping competitors’ products as well as (allegedly) sending disparaging letters to doctors about such competitive products is what fueled this negative fire. Medco responded to such charges by indicating that competitors drugs did not offer a "clinical advantage" over their own drugs and that giving preferential treatment to a parent company’s drugs helped the customer to reduce their overall costs. Even with these political challenges, Merck continues to leverage its ownership of Medco as a way to access the end-user of their drugs. Merck hoped that this contact with consumers would only help their efforts to market their products directly to them.


Strategic Options for Merck

Gilmartin knew that Merck would have to develop strategies to respond to these challenges and changes. He considered four general strategic approaches Merck could take:

Any one of these four options would require not only a great deal of money, but also some organizational re-alignment to match the chosen strategy.

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