Merck Move Shows Industry Adrift

When Merck (MRK Quote) crowned a new CEO last week, some disappointed investors saw fresh evidence of an entire industry that has yet to get its priorities straight.

Merck chose an insider without a background in medicine at a time when observers agree that the company desperately needs to focus on developing new drugs. Moreover, Merck made its selection even after its glory faded under a previous nondoctor, Ray Gilmartin.

Richard Clark, tapped last week to replace the embattled Gilmartin, is no master of drug research or even the marketing activities that, to the dismay of some, now seem to drive the industry. He has instead spent his 33 years at Merck concentrating on such areas as manufacturing and information technology.

"That was the best they could get?" asks Peter Cohan, an investment strategist who praises Merck's last physician CEO -- Roy Vagelos -- in his book The Technology Leaders. "It is hard to see how a manager lacking experience in drug development can help revive the critical pipeline of new drugs that contributed to the success of this once great company."

These days, however, the entire drug industry seems far less admirable than it once did. The past year, in particular, has taken a heavy toll on both the industry's reputation and its stock performance.

Merck has simply fared worse than most. The company's withdrawal of Vioxx, a popular painkiller linked to heart attacks, has eliminated a huge source of corporate profits and triggered a flood of lawsuits that could lead to billions of dollars worth of damages.

But it has also raised concerns about the drug industry as a whole. Public leaders have begun to question how companies manage to gain regulatory approval of drugs like Vioxx and then turn them into wildly profitable blockbusters. And they have come to recognize the industry's incredible influence -- over drug development, approval and even consumption -- in the process. In this first installment of a five-part series this week, TheStreet.com examines these apparent conflicts and their implications for these companies and their investors.

Vera Hassner Sharav, president of the Alliance for Human Research Protection, has been warning about such powers for years.

"The companies design the drug trials," Sharav says. "They select the subjects. They maintain and interpret the data. They select which parts get published. They choose who will become the reviewers in the prestigious medical journals. And they pick 'key opinion leaders,' who they pay handsomely" to promote the drugs.

"It's perfect," she concludes. "They have it made."

But that formula, which doesn't guarantee important new cures, could be starting to backfire. Drug stocks like Merck and Pfizer (PFE Quote) have been profitable investments in the past. However, those stocks -- hurt by withdrawn drugs and the lack of new drugs to replace them -- have lately fared worse than the broader market. Both stocks are, in fact, worth about 25% less than they were just one year ago.