Capitalism with a human face is the bottom line at Merck

In the vast reception area of pharmaceutical giant Merck's headquarters in New Jersey stands a seven-foot sculpture named "The Gift of Sight".

It depicts a young African boy holding a wooden stick in his right hand. With it he is guiding an older man whose eyes have been dimmed by river blindness, a disease which extinguishes the sight of millions of people in the developing world.

But that is changing. Merck found that a drug used to treat worms in livestock could paralyse the microscopic equivalent that cause river blindness in humans and thereby alleviate the symptoms of the disease and prevent sight loss.

The company announced in 1987 that it would donate the new medicine Mectizan to all who needed it for as long as was necessary to treat river blindness. A decade later, more than 18 million people were being treated annually and the process is still under way in co-operation with the World Health Organisation, the World Bank and more than a dozen non-government development organisations.

Just a few feet from the sculpture depicting this story, a computer terminal is perched beside the receptionist. The screen is filled with a page from Yahoo Finance, tracking share prices.

It is a conjunction that neatly encapsulates the sector in which Merck is the leader: the top line in this multibillion-pound industry can mean the difference between life and death for the end user of pharmaceutical products. But the bottom line is dictated by the financial imperatives common to every other business. That is profits, margins, stock markets and the search for the next new product that will keep Merck ahead of its rivals.

This latter challenge is probably the key issue concerning most of the company's investors, according to Merck chairman, president and CEO, Mr Raymond Gilmartin, given that in the period 2000-2002, patents expire on drugs accounting for somewhere near 22 per cent of its sales.

Against this background, the company spent $1.8 billion (€1.7 billion) on research in 1998 and expects that figure to rise to more than $2 billion this year. And in the past five years, it has introduced 15 new drugs and vaccines in a period of development unmatched in its history.

Says Mr Gilmartin: "Because of the success we have had in launching the 15 drugs in the last five years, we are confident we can offset those patent expirations and still show growth rates that are competitive with other leading pharmaceutical companies."

Mr Gilmartin, who was at the Merck Sharpe & Dohme manufacturing plant at Ballydine, near Clonmel, Co Tipperary yesterday for the opening of a £130 million (€165 million) expansion, says the research strategy is based on identifying large patient populations whose needs are not well served or not served at all, where there is new knowledge about the pathway of disease and "where you can come up with a novel mechanism of action to interrupt that pathway".

He adds: "That usually involves coming up with novel chemistry as well. So that's our definition of a breakthrough."

He cites the example of Merck's newest drug - Vioxx - which is used to treat arthritis and pain, and the success of which is based on inhibiting a specific enzyme and that enzyme alone.

The ideal formula, he says, is to develop drugs that are taken orally and once a day - in the interests of convenience - and that are "highly potent and highly specific so they are well tolerated".

Mr Gilmartin points out that advances in drug discovery technology - or tools - pose a significant challenge for the company because they allow rivals to follow it quickly.

"So in the late 1980s you might be alone for four or five years on the market with a pioneer drug. But in the late 90s you are lucky to be alone for three or four months before you have a new competitor and others to follow after that."

Rivals can respond with such swiftness, he explains, because of the different options available at various stages along the pathway of a disease. "There are various points you can choose or approaches you can choose and how you do your chemistry and so on, that will allow you come up with enough novelty to get a patent. And so these are all patented drugs."

The end result for the companies involved is greater competition for market share as the medical profession views the drugs involved, even though they are patented, as close substitutes for each other.

This increased competition, says Mr Gilmartin, places "a great premium on your research capability to come up with drugs that are truly distinguished by their performance characteristics".

But he insists: "This is an environment in which a company like Merck can thrive. This is an environment that we like."

It also tests those working beyond the research phase: placing a premium on "your marketing sophistication", on the manufacturing function and "on the speed and flexibility of the organisation".

In the case of Vioxx, for instance, the drug was being shipped within three days of being approved by the Food & Drug Administration and was on the shelves of 43,000 pharmacies in the US within 11 days.

The scale of the task in bringing a new product to market is underlined by the period involved - an average of 12 to 15 years to develop a new drug from start to finish.

But what then of the search for so-called wonder drugs, blockbuster products that will combat diseases such as cancer or HIV/AIDS? In relation to the former, Mr Gilmartin says there is a high rate of innovation but "it is still early to tell exactly what we have at this point". Advances in knowledge through genetics and so on, he says, allow new approaches to treating cancer. These involve throwing "monkey wrenches into the machinery of cancer as opposed to trying to use chemicals to overcome it". He adds: "I think that opens up a lot of new possibilities."

In the case of AIDS, he says that great progress has been made in terms of saving lives and, in some respects, putting HIV/AIDS into a more manageable state. But a cure remains elusive and he says the ultimate solution could be something like a vaccine which is "scientifically extremely difficult".

He adds: "It has been reported in the press and we have confirmed the fact that we had been working on a HIV/AIDS vaccine from some years. It is still a very high risk stage of development. . . We are hopeful that something positive can happen here but it's high risk and really too early to tell."

He contends that new drugs continue to benefit large patient populations suffering from conditions ranging from osteoporosis to asthma. "So where some of the cancer and some of those conditions may get greater visibility, there have been a number of breakthroughs over the last few years that make a big difference in terms of people's quality of life and the ability to save lives."

So where does Merck's Irish operation fit into the company's strategy? The Ballydine plant was originally developed between 1972 and 1975 and the latest expansion brings the capital investment involved to £500 million (€635 million), Merk's single largest outside the US.

The Irish plant now has a 430-strong workforce, producing bulk active ingredients which are exported to other Merck facilities and formulated into tablets and capsules.

Mr Gilmartin makes clear that the presence of Merck's existing operation here did not guarantee expansion, even with overall capital expenditure running at about $2.5 billion. Factors contributing to the decision to select Ireland for further growth included the "excellence" of the existing plant, confidence in management there and also "longterm confidence. . . in terms of availability of people" and a "favourable business climate".

While he acknowledges that the Irish corporation tax regime was a key factor in this regard, other members of Merck management go further, stating that without the tax advantage, the expansion would have gone to Singapore.

In the negotiations leading to the Irish expansion, the president of Merck's manufacturing division, Mr Bernie Kelley, had intensive discussions with the then Minister for Finance, Mr Ruairi Quinn, about the taxation environment and pressure from other EU states to increase the corporation tax rate here.

Mr Gilmartin also says that in the next round of capital spending, the Ballydine operation will be strongly considered for further development although he declines to specify a timeframe.

The company looks at least five years ahead, he says, adding: "I think it would be some time before we were in a position to say, in any place in the world, that we are ready for the next round of investment."

Mr Gilmartin says that the manufacturing function at Merck aspires to the highest level of excellence, with a strong commitment to the staff involved and to protecting the environment.

In this context, word association tends to link the name Merck Sharpe & Dohme with that of Mr John Hanrahan and his family. After a long legal battle, they were awarded damages - believed to be in the region of £2 million - against the company by the Supreme Court in 1988 for ill-effects on Mr Hanrahan's health and that of his cattle due to toxic emissions from the neighbouring Ballydine plant.

Mr Justice Henchy held that the facility was the main source of "acid mists" in the Suir Valley and, in spite of scientific evidence offered by Merck Sharpe & Dohme, that this was the most credible explanation for ailments and abnormalities on the Hanrahan farm.

Company management insists that this period "is behind us". "I don't even think about it," claims one senior official. Mr Hanrahan, however, is understood to have unsuccessfully sought an oral hearing into the plant's expansion and to be concerned about what he claims are odours from it.

A non-technical summary of the environmental impact statement relating to the Ballydine plant says that since January 1st, 1987, more than £30 million has been invested in environmental protection facilities there and that this investment is ongoing.

Mr Gilmartin - who joined the company in 1994 - says he has "no background" on the Hanrahan case. But he contends that Merck's record on the environment is "quite exemplary and in terms of the awards and the recognition that we have in terms of how the company has protected the environment". He says it has achieved its goal of reducing emissions worldwide in all of its plants by more than 90 per cent.

Looking to the end consumer of the company's products, Mr Gilmartin argues that they are benefiting from the increased competition which has reduced price flexibility in the industry. He forecasts that they will ultimately have much more information too about the health benefits of particular drugs while health systems will be better informed about their cost effectiveness.

And in the European context, he strongly opposes price controls on pharmaceutical products and advocates price liberalisation - an issue under discussion in the so-called Bangemann round table involving the European Commission, member-states and industry representatives.

He says that from the perspective of the industry, price controls destroy innovation. "There are some analogies you can see, say in the telecommunications industry when it was deregulated," he adds.