Ailing Merck Defies Cure

Not Invented Here

The biggest criticism of Merck is that it didn't move fast enough to make deals with traditional drug and biotech companies -- copromotion, codevelopment and product licensing deals -- to create a wider portfolio of scientific opportunities.

"Merck was a little late to the game," said C.J. Sylvester of Schwab Soundview Capital Markets, who has a neutral rating on the stock. "There was a lot of 'not invented here,' but that's changing." (He doesn't own shares; his firm doesn't have an investment banking relationship.) Although Merck's earnings and revenue will remain torpid for the next two to three years, Sylvester said the newly aggressive licensing strategy will eventually pay off. The increased licensing prompts him to speculate that Merck will choose an insider to succeed Gilmartin.

Gilmartin has indirectly admitted that Merck had been slow to react. "We are identifying and entering into external partnerships and alliances that complement and supplement our own R&D efforts," he told shareholders on April 27. "In 2003, we closed on 47 significant transactions. Compare that with just 10 such transactions only five years ago."

Recent partners have been as big as Bristol-Myers Squibb(BMY) for a diabetes drug in late-stage testing or as small as Alnylam Pharmaceuticals(ALNY) for preclinical work on eye disease treatments.

Analysts say Merck's altered approach is better late than never. "'Not invented here' is now a core strategy," said David Moskowitz of Friedman Billings Ramsey, in a recent report to clients. (He rates the stock as market perform; he doesn't own shares and his firm doesn't have an investment banking relationship.) Moskowitz and other analysts note that a number of Merck's recent licensing deals are being signed when clinical tests of drugs haven't begun or are in their early stages. That's riskier -- but less expensive -- than making deals involving drugs that have entered late-stage testing.

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