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Looking Back At Merck/Schering-Plough

Here’s Ed Silverman Peter Loftus at Pharmalot, looking back at the Merck/Schering-Plough merger. It has not gone quite like the initial plan:

First, a little history. In November 2008, Schering-Plough Chief Executive Fred Hassan told analysts and investors gathered at the company’s Kenilworth, N.J., headquarters it was developing “five stars” with big sales potential. They were: 1) rheumatoid-arthritis treatment golimumab (with Johnson & Johnson JNJ -1.50%), 2) the antipsychotic Saphris 3) Bridion 4) the anticlotting drug vorapaxar and 5) a hepatitis C treatment called boceprevir.
It was within weeks of Hassan’s stargazing that Merck began courting Schering-Plough, leading to the Merck takeover in 2009. Merck touted the five stars among other Schering drugs, as well as the deal’s potential for big cost cuts.
The five stars did make it to market (in the case of Bridion outside the U.S.). But none has significantly moved the needle for Merck, whose annual sales have fallen each year since 2011—to $42.2 billion last year—hurt by patent expirations for older drugs. . .

Well, a lot of people will tell you that this sort of salesmanship was Hassan’s strong point. And drug development is, as we all have had chances to notice, unpredictable. But doesn’t everyone sound so confident when they announce these mergers? Isn’t the future just laid out there to be marched into and conquered? You don’t hear anyone going on about how gosh, you just never know in this business, it might work out and it might not. No, the bold leadership of Company A has stepped up and seized the opportunities provided by Company B, and all manner of things will be well in consequence.
As Silverman Loftus shows, in the Merck/SP case, the bright spot has been Keytruda (pembrolizumab), which was considered to be a roundoff error in the deal compared to all those other big, promising compounds. It’s not like Schering-Plough thought a lot of it, either (if they had, you can bet that Hassan would have put a sixth star up there immediately). Keytruda was originally from Organon, and when S-P bought them in 2007, it wasn’t even mentioned in the press release or the articles written at the time.
So it’s a pretty safe bet that Merck’s management would have been nonplussed to hear that Keytruda would turn out to be the best thing that they got out of the deal. And they would probably have had to hold on to the back of a chair or something if you’d shown them what was in store for Fred Hassan’s “five stars”. As The Clash used to put it, the future is unwritten.

30 comments on “Looking Back At Merck/Schering-Plough”

  1. Andy says:

    At the boardroom level, you’re an advocate of change or you’re a dinosaur. ‘Let’s pause and maintain the status quo for a while’ is the kind of rallying cry that gets you fired.

  2. Anonymous says:

    Back in 2007 Keytruda was probably pretty far back in its development unlike the 5 stars which were all in the late stage pipeline at that point. Organon folks obviously thought it was worthwhile as they were the guys that kicked it all off!

  3. TeddyZ says:

    Poor Organon was bought twice in the span of several years. And all they got was fired for it. As someone who “helped Merck” cut costs, I’d be willing to give my opinion on how things were handled.

  4. The Aqueous Layer says:

    @1
    Not just the board-room. Change for change’s sake is happening down at the bench level as well. If you aren’t trying the newest, untested hardware, computational programs, open office concepts, you are just getting in the way of ‘progress’. “Staying the same isn’t an option” is a functioning mantra where I work.

  5. steve says:

    For a long time I’ve been saying that someone should do a study of how accurate the market predictions are for drugs. Every company uses marketing predictions so determine the fate of their drug candidates but it would be really interesting to know if any such predictions ever hit the mark or if you could do just as well having a monkey throw a dart.

  6. Hap says:

    1) It cost Merck money – with the change of control clauses, they had to give up some of the revenue from Remicade to J+J (as per http://pipeline.corante.com/archives/2011/04/18/merck_and_jj_finally_come_to_terms.php) to make this go, so not only did they not get revenue, it cost them money (not counting what they didn’t develop because they were busy synergizing – but they didn’t have to pay the “desynergized” employees either, I guess).
    2) Why is it that “financial engineering” seems to bear only a sarcastic resemblance to actual engineering?
    3) @5: I guess the concept of having a mission (making useful drugs, selling them, and helping people) is passe now. Why would management ever want to actually be responsible for making anything? – after all, that could actually be measured and responsibility apportioned, while facilitating change and innovation can’t… I wonder how the shareholders (much less everyone else) feel about this.

  7. Anonymous says:

    In fairness, I am sure that the folks at Merck looked deeper than the stars in considering the merits of the merger. Due dilligence would give them access to the earlier stage pipeline that may or may ot have been on the public radar, so these additional items coming off the bench to replace fallen stars really should not be a surprise. The real verdict on the merger will come 5-10 years from now, when the combined company will need to sustain itself on its own merits rather than from buying someone else’s assets. Which way that will go is nothing but a wild guess at this point.

  8. anonymous says:

    @5 you don’t even need to train a monkey, turns out a human throwing darts will suffice: http://www.nature.com/nrd/journal/v12/n10/full/nrd4127.html

  9. Hap says:

    1) It cost Merck money – with the change of control clauses, they had to give up some of the revenue from Remicade to J+J (as per previous discussions here) to make this go, so not only did they not get revenue, it cost them money (not counting what they didn’t develop because they were busy synergizing – but they didn’t have to pay the “desynergized” employees either, I guess).
    2) Why is it that “financial engineering” seems to bear only a sarcastic resemblance to actual engineering?
    3) @5: I guess the concept of having a mission (making useful drugs, selling them, and helping people) is passe now. Why would management ever want to actually be responsible for making anything? – after all, that could actually be measured and responsibility apportioned, while facilitating change and innovation can’t… I wonder how the shareholders (much less everyone else) feel about this.
    4) It will take time to see how everything goes, but 1) have any of the previous drug company mergers gone better than the companies separately (or perhaps even the purchasing company alone)? and 2) the products were the arguments to the people supposedly in control (shareholders) as to why the merger was a good idea. Even if something else might pan out, the logic posited by the people undertaking the deal didn’t work – either there was other logic (not so good for shareholders) underpinning the deal or the people doing it were not capable enough to understand its consequences. Neither is a good omen for the future consequences of the deal.

  10. Hap says:

    Sorry for the double post – I was impatient.

  11. Jack Scannell says:

    @5, for the confessions of an ex dart thrower, see: http://www.accesstomedicine.co.uk/news-and-events/what-bad-forecasts-say-about-pharmaceutical-and-biotech-innovation
    “..Sadly, it looks as if donation-seeking medical charities, grant-seeking academic scientists, and investment-seeking drug companies have spent so long telling everyone that new drugs are the predictable consequence of a rational scientific design process that something truly awful has happened. Policy makers have started to believe them and act as if it were true.”

  12. John Wayne says:

    I generally agree with the sentiment in post 11; I hypothesize that there are at least two reasons why there is disconnect between the reality of our understanding of drug discovery, and how it is talked about.
    1. Money and human decision-making.
    At the end (or beginning) of the day, somebody has to agree to give you money to try and come up with a new drug.
    If you were to tell them that you were going to muddle into the lab, do the best you can with the state of our inferior understanding of biology, then ask for even more money to take a poorly educated risk in the clinic – you wouldn’t have much work.
    Instead, we explain why we think it will work, and why the data supports a clinical and market entry; then, human nature transforms this experiment into an expectation.
    2. Scientists like to think we are smart.
    Everybody knows there is luck is drug discovery; we call it serendipity. Why? More syllables, and it makes us sound smarter.
    At the end of the day we’re running a clinical experiment with large unknowns; if I put this in a person what will happen? This can range from fairly safe (known molecules, known targets) to wildly speculative (new API, partially understood medical need.)
    We like to think that we’re learning how to do this without falling into the same pitfalls as before, and we tend to overestimate the breadth and applicability of our own knowledge. We know a lot more than we did 20 years ago, but it’s a drop in the ocean when contrasted with what we would like to know.
    In summary, the message gets diluted because nobody wants to hear it. From my own experience, as one gets away from the bench and towards management, the tendency to be deluded by our own storytelling gets harder to resist.

  13. Ozymandius says:

    One shouldn’t forget what this merger brought Merck in real dollar terms. They got the second half of Zetia and Vytorin sales (~4.6 billion USD total last year), one of the best consumer brands divisions (recently sold off), the lead in the BACE race, and a vital animal health division. A good question is “what would their sales be (or fate be) in the absence of this merger?” I suspect they are significantly better off having done so. The folks who are likely not are the very many good people shown the door.

  14. Lyle Langley says:

    @7…,
    “The real verdict on the merger will come 5-10 years from now, when the combined company will need to sustain itself on its own merits rather than from buying someone else’s assets. Which way that will go is nothing but a wild guess at this point.”
    They probably will not get to the 5-10 year position as a new stand-alone company. They will more than likely buy someone else’s assets in that time frame. Always resetting the clock is what many are doing.

  15. WhosLaughingNow says:

    So, where are the new drugs and products in the MERCK pipeline? You know, the ones they didn’t get from the Schering merger or by licensing from other RESEARCH companies. Was the Schering merger really worth putting 50 thousand people out of work? Was the Schering merger worth stopping vital research into different drug therapy areas?

  16. ScientistSailor says:

    @12
    Everybody knows there is luck is drug discovery; we call it serendipity. Why? More syllables, and it makes us sound smarter.
    So does that make us serendipologists? or serendiptitions?

  17. Harync says:

    I wonder about the flip side of the prediction business: How many times have the people/monkeys who throw the darts told the scientists that an indication, target, etc is not “commercially-viable.” There is only so much money to go around to fund clinical trials, so how many drugs may have been killed to fund the “best shots on goal.” These aren’t the greatest examples, but some companies probably wouldn’t have bothered with rogaine or viagra.

  18. Flem says:

    The goals of mergers are entirely to generate greater profitability.
    Not to hire more people
    Not to develop more or better drugs
    It’s simply profit before people; or shareholder before employees.
    Do mergers benefit society or our economy? Doubt it.
    Should we regulate against them? probably not.
    The free market is far from perfect, but any betteralternatives?

  19. Jack Scannell says:

    @17 – there is a paper from 2013 titled “The most transformative drugs of the past 25 years: a survey of physicians.” (PMID 23681007) by Kesselheim & Avorn. I am sure other readers of this blog know the history of the 25 drugs much better than I do. However, it seems obvious that some – perhaps most – were not obvious winners. Looking down the list of the 25 drugs, the anti-TNFs were first trialed in septic shock and failed before finding use in RA, Crohns, etc. I understand that SmithKlineBeecham patented a viagra-type drug several years before Pfizer. They knew exactly what it did, but killed the project (which may also cast doubt on the Pfizer serendipity story to a certain extent). The tricky history of Gleevec is well known. Lovastatin had a very bumpy ride through clinical trials, with widespread doubts about the value of its therapeutic target and some safety concerns if I recall correctly. It seems that Propofol became a big hit because it helped the rise of day-case surgery (which may not have been anticipated before the drug launched). It is also probably true that alglucerase/Ceredase surprised a lot of people; there turned out to be far more Gaucher patients than originally thought. I am not sure that GSK had particularly high hopes for Advair at first. Again, and I may be wrong here, but I think the major commercial use of Botox was also a field discovery by doctors.
    The problem, of course, is this kind of unpredictability – while an obvious feature of R&D and drug markets – is hard to manage.

  20. Magrinho says:

    @18
    Fortunately, there are no truly free market economies or most scientists over 60 would be eating dog food by now.
    But stronger labor laws are a speed bump to strip mining mergers.
    To protect jobs yet maintain an innovative culture, it’s a question of titrating those laws to the culture/society in question.
    Myself, I think Switzerland has it about right. Firing folks there is possible but requires paying for the damage wrought. Firing someone in Germany is next to impossible and, to me, goes too far. Obviously firing someone in the US bears trivial costs.

  21. kyosce says:

    @ 16
    “Everybody knows there is luck is drug discovery; we call it serendipity. Why? More syllables, and it makes us sound smarter.
    So does that make us serendipologists? or serendiptitions?”
    It makes us skilled and experienced gamblers trying to earn more money than we lose in the game of therapeutic molecules.

  22. Sympa says:

    @20: the situation would be a lot better of people who get fired can continue doing the work they do. No anti-competes, facilities not destroyed, etc.
    That would take the fun out of buying a competitor to destroy it: it could easily be taken over by a new investor (who only has to fund running costs).

  23. too much credit says:

    @7: They may well have reviewed every project that was running in discovery and development but I think you give them too much credit. I cannot confirm this as a fact but I was told that Keytruda was put into “the hopper” only for the project to be quickly reactivated on the back of the BMS results. There are many other examples of apparent incompetence including the inability to get Bridion onto the US market.

  24. RB Woodweird says:

    “The sun will rise, the sun will set, and I’ll have lunch.” — 1987, Red Sox GM Lou Gorman when asked what might happen if he didn’t reach a contract agreement with the great Roger Clemens.
    “The stock will rise, the stock will fall, and I’ll get a huge bonus.” — Fred Hassan, when asked what would happen if his Gumplike optimism was unfounded.

  25. Anonymous says:

    @14- sadly, you may be correct as this is the new model of Pharma R&D. In any case, one cannot judge the value of the merger based on a late 2009-early 2015 timeline, lest we be guilty of the same short-term thinking we often criticize.
    @23-I had heard something similar, but my understanding of the Merck “hopper” is that it is not a trash bin but rather a “stack” from which things can be “popped” in short order. Clearly they did not think enough of it to give it a high priority like the S-P BACE inhibitor. They must have perceived some value to not have sold the rights away. In any case, my point remains that while the failure of the stars to live up to their potential is troubling, I am sure the folks at Merck and at Schering-Plough discussed the strength of “the bench” before agreeing to the merger.

  26. DH says:

    @11: Thanks for the link. That’s an excellent article. Based on the data, the author has some thought-provoking recommendations:
    “If, as the bad forecasts suggest, drugs’ real-world usefulness is genuinely unpredictable, then rapid pharmaceutical progress requires more drugs brought to market more cheaply. The role of the drug industry should be to provide the maximum of therapeutic variation on which real-world selection then acts. Regulation and pricing should emphasize the creation of acceptably safe variation and its subsequent real-world selection by patients and doctors. It is a mistake to insist on too much ‘evidence’ before launch if such evidence evidently fails to support accurate predictions of drugs’ ultimate adoption and utility. At the same time, demands for relatively uninformative ‘evidence’ increase cost and reduce the variation on which real-word selection by patients and doctors can act.”

  27. ANOB says:

    Who didn’t Pfizer buy? Mother Merck. All in the game yo, all in the game.

  28. Anonymous says:

    We will never know how the companies that were acquired, assimilated, wasted or whatever name you may give it, would have performed on their own,
    Certainly, looking at their managements at the time, they may have suffered or ceased to exist anyway.
    But to bring the point back to Organon, they were in a difficult situation as well at the time. They were able to ride the waves better for years as they were part of Akzo Nobel. After Akzo sold of Organon by the way as a nice anecdote, they bought ICI followed by trouble, crisis in the paint sales etc. Their market cap is not more as what they have sold of Organon Bioscience for.
    When I was at Organon, management also predicted a golden future on Saphris, Bridion, etc. They had already abandoned research on fertility and contraceptives and gearing up for inflammation and oncology…….
    Having lived through the 2 mergers, and all the BS we had to swallow, I’ve learned one thing, maybe we didn’t have the top scientists from Harvard or Stanford to make decisions, but we knew how to make drugs. I was sometimes astonished in project meetings how little focussed the scientists and the management were on actually keeping an eye on the ball.
    Well, let’s stop ranting. Organon and S-P are no more. With that, a culture died that may have provided a better future, both for the people that worked there as well as the future of new innovative medications….

  29. Emjeff says:

    Isn’t interesting how no one at the top is ever held accountable for their bad decisions? Case in point:Patrick Vallance, who spent close to a billion on the Sirtris take-over. GSK realized zero value from that deal- no compounds in the clinic and no discovery program. Yet, he is still at the top, bumbling along, while one-third of the company gets lopped off.

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