Merck will refrain from entering into co-promotion agreements to take advantage of its sales force capacity, CEO Raymond Gilmartin told securities analysts Dec. 9 at the company's Whitehouse Station, N.J. headquarters.

"We have determined that we do not want to do co-promotion agreements," Gilmartin said, citing "defects" like finite terms, up-front payments and product quids. "We think the best use of our sales force capacity is for our own drugs."

Gilmartin contrasted co-promotion deals with licensing agreements, which Merck enthusiastically supports. "We prefer to own the product through a licensing agreement...and have it for the complete life cycle of the product. We think that is a more longer term, economically successful strategy."

Licensing agreements have been pivotal to Merck's growth, most notably the 15-year Astra agreement that gave Merck U.S. rights to Prilosec. The Astra Merck joint venture ended in 1998, but Merck continues to receive payments on sales of the ulcer drug.

Chief Financial Officer Judy Lewent told analysts that Merck will receive payments from AstraZeneca at a rate of 20%-27% for the Prilosec-successor product Nexium (esomeprazole). The exact range will be worked out prior to launch, she said, but "if it looks just like a Prilosec, it will be at a higher end of that range" (¹ Also see "AstraZeneca Nexium NDA Includes "On-Demand" Dosing" - Pink Sheet, 13 December, 1999.).

To highlight its commitment to licensing, Merck noted that former Exec VP-Worldwide Basic Research Bennett Shapiro, MD, was recently elevated to the newly created position of exec VP-worldwide licensing & external research. Roger Perlmutter succeeded Shapiro as head of basic research.

Merck's comments on co-promotion come in the context of a re-evaluation of the strategy prompted by the bidding war over Warner-Lambert.

Pfizer's co-promotion agreement with Warner-Lambert for Lipitor was viewed as proof of the value of co-promotion agreements, but the drawbacks have come into sharper focus following Warner-Lambert's friendly merger agreement with American Home Products and the subsequent hostile takeover bid from Pfizer.

Another Pfizer co-promotion agreement, for Searle's COX2 inhibitor Celebrex, may be complicated by the continuing strategic uncertainty surrounding Monsanto (² Also see "Searle auction coming?" - Pink Sheet, 13 December, 1999.).

Merck has products competing against both Lipitor and Celebrex (Zocor and Vioxx).

Merck remains committed to a merger-free growth strategy. "Companies that have expanded through internal R&D have grown faster - and created more shareholder value - than those depending on mergers," Gilmartin declared.

The potential for a Pfizer/Warner merger to reset the benchmarks for size in the pharmaceutical industry is not in itself a threat to Merck, Gilmartin said.

After an "analysis of the combination of those two companies or any other companies out there," Merck believes "there really is no combination that changes the competitive landscape vis-a -vis Merck," Gilmartin declared.

A Pfizer/Warner-Lambert merger will not "change the growth rate of the leading health care companies," which is how Merck benchmarks its performance, Gilmartin said.

The $4 bil. R&D budget of the potential merged company also is not a threat, he said. "If you bring two laboratories together that are already fully occupied, it is hard to see how you get extra synergy. It is more of a question of how much they are working on that is redundant," Gilmartin commented.

Merck Research Laboratories President Edward Scolnick, MD, added that "the dollars we have at this point are not what is rate-limiting in our ability to discover new drugs."

Merck will look at smaller acquisitions to supplement its access to new technologies, Gilmartin indicated. "We are really after leading edge science and keeping ourselves on the edge of selected therapeutic categories."

Scolnick cited the acquisition of SIBIA Merck completed in November. "We did not have a large enough effort in neuroscience," Scolnick said. "This was the fastest, most cost-effective way" to enlarge that effort.

Merck Maintains Merger-Free Philosophy; Co-Promotions Also Ruled Out

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