Merck: Managing Vioxx (A)

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1 APRIL 20, 2009 Merck: Managing Vioxx (A) Whatever decision we make is going to be based on the science and what's in the best interest of the patients. 1 Ray Gilmartin, 2004 In January 1999, pharmaceutical giant Merck and Co. s research pipeline was growing more robust as a result of increased research and development funding initiated by CEO Ray Gilmartin. New drug development was critical because patents on seven of Merck s bestselling drugs would expire in 2000 and 2001, representing an estimated 22% revenue loss for the company. 2,3 Furthermore, Merck s blockbuster anti-cholesterol drug, Zocor, was losing significant market share to competitor Pfizer s anti-cholesterol drug, Lipitor. One of the most promising drugs in Merck s pipeline was Vioxx, an arthritis and acute pain medication in the non-steroidal anti-inflammatory drug (NSAID) category. Compared to other NSAIDs such as aspirin, which could cause gastrointestinal (GI) damage if taken over extended periods of time, Vioxx had been shown to cause significantly less GI complications. Given the drug s unique properties and the size of its target population including 23 million arthritis sufferers in the U.S. alone 4 Gilmartin and other Merck executives hoped Vioxx would reinvigorate the firm s sales. Fueling the urgency to introduce Vioxx quickly, Pfizer had released a similar drug, Celebrex, just weeks earlier. As Gilmartin and the Merck team prepared to release Vioxx to the U.S. market, they wondered how valuable the drug could potentially be to Merck s future profitability. Merck: Merck was a global pharmaceutical firm that developed, manufactured, and marketed medicines and vaccines. Since its founding in 1891, Merck scientists had discovered numerous important medicines, including the first steroid cortisone in By 1999, the company employed 62,000 people including many PhDs and medical doctors in more than 100 countries. 5 1 Ilan Brat, Former Merck CEO Calls Vioxx Testing Thorough, The Wall Street Journal, August 10, This case draws heavily on the Report of John S. Martin to the Special Committee of the Board of Directors of Merck and Co., Inc. Concerning the Conduct of Senior Management in the Development and Marketing of Vioxx, September 5, 2006, Subsequent citations are abridged to Martin Report. 3 Martin Report, Appendix B, p Arthritis: Data and Statistics, National Center for Chronic Disease Prevention and Health Promotion, accessed September 17, Merck and Co., Inc., 1999 Annual Report, p. 1, and Merck and Co., Inc., Dain Rauscher Wessels, December 8, 1999, via Thomson ONE Banker, accessed April Professor Robert Simons and Research Associates Kathryn Rosenberg and Natalie Kindred prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call , write Harvard Business School Publishing, Boston, MA 02163, or go to This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

2 Merck: Managing Vioxx (A) Dr. Roy Vagelos, president and CEO of Merck from 1985 to 1994, was one in a long line of top Merck executives with a background in science and research who had been promoted from within. During Vagelos s tenure, Fortune Magazine voted Merck America s Most Admired Company for a record-breaking seven years in a row, creating a reputation for Merck as a great place to work. Although Merck was highly respected as a research leader in the pharmaceutical industry, the firm s stock price had dropped in the early 1990s, and revenues had flattened. (Exhibit 1 shows summary financial information from 1989 to 1993.) Enter Gilmartin In 1994, Ray Gilmartin (HBS MBA 68) was elected by the board of directors as Merck s president, chairman and CEO. An engineer by training, Gilmartin had spent the early years of his career at Eastman Kodak before becoming a consultant at Arthur Little. He later joined medical device manufacturer Becton Dickinson as vice president for strategy, and was appointed president and CEO of Becton Dickinson in To some, Gilmartin was an unusual, and possibly risky, choice: he lacked pharmaceutical experience and had run a company only a quarter the size of Merck. However, he had a reputation as a consensus-builder and his strengths dovetailed nicely with Merck s needs: Gilmartin had ushered Becton Dickinson through the price pressures of managed care in the mid-1980s and had boosted the firm s international profile. As Merck s CEO, Gilmartin reaffirmed the company s commitment to organic growth through investment in product R&D. At a time when many pharmaceutical companies were driving growth through mergers and acquisitions, Gilmartin argued that these actions offered only short-term gains in shareholder value while distracting employees and diluting the culture of the companies involved. Rather than pursuing growth through a merger, Gilmartin increased Merck s R&D budget dramatically (see Figure A). 6 Figure A Merck R&D Expenditures, ($ millions) $3,000 $2,000 $1,000 $ Source: Adapted from Merck and Co., Inc., 2003 Annual Report, p. 22. Soon after taking charge, Gilmartin called an off-site strategic planning meeting during which Merck s top managers articulated a research strategy for the years to come. They agreed to focus on developing drugs that met five criteria: drugs would target large patient populations; involve new 6 Merck Senior Management Stresses Strategy for Growth, Business Wire, December 12, 2005, accessed October 27,

3 Merck: Managing Vioxx (A) knowledge about the disease or the chemistry of the drug class; be taken orally; be taken once per day; and be specific to the target patient group and highly potent. 7 During his first five years at Merck, Gilmartin developed a reputation as a growth-oriented but responsible leader. (See Exhibit 2 for Merck financials from ) A Fortune magazine article reported, When employees describe Gilmartin, they use words like highly ethical and say he has a strong commitment to values. When confronted with difficult decisions, he is legendary for asking, What s the right thing to do? 8 Gilmartin was particularly fond of reminding Merck employees of the words spoken by former Merck president George W. Merck in 1950: We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been. 9 Painkiller Drugs In the late 1990s, all classes of painkiller drugs had drawbacks. Narcotics (e.g., morphine) temporarily blocked severe pain, but were highly addictive. Local anesthetics (e.g., Novocain for dental work) numbed the immediate area, but the effects were short-lived. Non-steroidal antiinflammatory drugs or NSAIDs (e.g., aspirin and ibuprofen) suppressed certain pain-causing substances in the body, but could cause GI complications after extended use, including ulcers, stomach bleeding, and intestinal perforations. Notwithstanding potential GI complications, NSAIDs were the most prescribed class of painkiller in the U.S.: an estimated 45 million Americans received prescriptions for an NSAID in In addition, many NSAIDs were available over-the-counter (OTC), including aspirin, ibuprofen (Advil, Nuprin, and Motrin), and naproxen (Aleve). NSAIDs eased pain by suppressing the Cox enzyme, found at sites of pain and inflammation. In the early 1990s, scientists identified two different Cox enzymes: Cox-1 and Cox-2. Researchers hypothesized that GI complications were caused by suppression of the Cox-1 enzyme. Therefore, if a drug could be developed that suppressed only the Cox-2 enzyme a Cox-2 inhibitor it would alleviate pain without agitating the GI tract. Developing a Cox-2 Inhibitor In 1994, scientists working in a Merck research lab in Montreal discovered the rofecoxib molecule, a Cox-2 inhibitor. Merck Research Laboratories in New Jersey took this discovery and immediately began developing a selective NSAID painkiller. Merck scientists knew that Pfizer was working furiously to develop and market its own Cox-2-inhibiting painkiller. Many believed the first firm to introduce a Cox-2 inhibitor would reap significant advantages; Merck s marketing department valued the advantage at $611 million Neff, Thomas J & James M. Citrin with Paul Brown, Lessons From The Top: The Search for America s Best Business Leaders, (New York: Doubleday, 1999), p Lee Clifford, Tyrannosaurus Rx, Fortune, 142, no. 10, October 30, Executive speech by George W. Merck at the Medical College of Virginia at Richmond, December 1, Martin Report, Appendix A: Sections A-G, p Martin Report, Appendix B, p. 7. 3

4 Merck: Managing Vioxx (A) Celebrex Pfizer won the race and released its Cox-2 inhibitor, trade-named Celebrex, in January Sales of the drug broke records immediately: within two weeks, Celebrex had captured 6% of the arthritis-pain prescription market. 12 With other blockbuster drugs in its portfolio, including Lipitor and Viagra, Pfizer was cash-rich and in an excellent position to market Celebrex aggressively. By May 1999 only four months after its introduction more than 2.8 million prescriptions for Celebrex had been dispensed. 13 Vioxx In May 1999, four months after the launch of Pfizer s Celebrex, Merck released its own Cox-2 inhibitor to the U.S. market under the trade-name Vioxx. The drug, which was marketed to arthritis sufferers, met all of the objectives set forth at the 1994 strategy meeting: Vioxx targeted large patient populations; involved new knowledge about advanced chemistry; was taken once per day orally; was highly potent; and targeted specific pain attributes. Merck supported Vioxx s launch with an extensive promotional campaign, spending $102 million in 1999 on visits by Merck sales representatives to physicians offices (as many as 150,000 visits per month). 14 To educate the sales reps about the new drug, Merck developed a training game called Dodge Ball Vioxx, based on the popular television game show, Family Feud. The game was designed to prepare representatives to respond accurately to physicians questions or concerns using claims approved by the U.S. Food and Drug Administration (FDA). During the training exercise, sales reps were split into teams and drew cards containing questions that doctors might ask about Vioxx (e.g., I am concerned about the cardiovascular effects of Vioxx ). To earn points, players were required to answer questions correctly using FDA-approved language to describe the drug s benefits and risks; to make the game more interesting, if a player picked a card that said Dodge, the player was allowed to skip his or her turn and earn an additional point. 15 From May through December 1999, doctors wrote more than five million prescriptions for Vioxx. The drug s release was, according to Merck s 1999 annual report, the company s biggest, fastest, and best launch ever; indeed, Vioxx sales generated the majority of the $578 million Merck earned in 1999 in its anti-inflammatory/analgesics line of business. 16 Vioxx s patent was set to expire in The VIGOR Trial On March 9, 2000 when Vioxx had been on the market for less than one year the results of a clinical trial on Vioxx were released to Merck. The trial, called VIGOR (for Vioxx Gastrointestinal Outcomes Research), was designed to compare GI adverse events, such as ulcers and internal bleeding, for rheumatoid arthritis patients taking Vioxx versus another painkiller; Merck elected to compare Vioxx to naproxen (OTC brand-name Aleve). As Gilmartin and his team had hoped, VIGOR confirmed that Vioxx decreased the risk of GI complications relative to naproxen: patients taking naproxen in the trial were more than twice as likely to suffer a serious GI event than those taking Vioxx. However, the data also indicated that patients taking Vioxx were twice as likely to have a serious cardiovascular event, such as a heart attack, compared to those taking naproxen. (See Table A for the results of the VIGOR trial.) 12 Prescriptions for Monsanto s Celebrex Soared to 55,000 in 2 nd week, Dow Jones Business News, February 1, An Uphill Battle (Vioxx, Merck s Antiarthritic Product), Med Ad News, 18, no. 6, June 1, Milton Liebman, Head-to-head marketing may the best-promoted drug win, Medical Marketing and Media, Vol. 35, Issue 11, November 1, Barbara Martinez, Merck explains documents, The Wall Street Journal, November 15, Merck 10-K and Annual Report, via Thomson Research, accessed July Merck Wins U.S. Patent Interference Proceeding on VIOXX, Business Wire, October 4,

5 Merck: Managing Vioxx (A) Table A VIGOR Trial Results (2000) Patients with Events Relative Risk of Naproxen vs. Vioxx Type of Adverse Event (AE) Treatment Group Patient Years a Rates of Adverse Events Complicated upper GI AEs Vioxx % 2.33 Naproxen % GI Bleeding Vioxx % 2.73 Naproxen % All serious Cardiovascular AEs Vioxx % 0.50 Naproxen % Source: Adapted from Martin Report, Appendix E, p. 2. a Patient Years was calculated by multiplying the number of patients by the duration of their participation in the trial. It was used to ensure the statistics generated were comparable to one another, despite the number of participants in each treatment group. Analyzing the Results While pleased that the VIGOR trial indicated that Vioxx was more GI-safe than naproxen, scientists at Merck Research Laboratories (MRL) were alarmed by the relative incidence of cardiovascular events for subjects taking Vioxx. The unexpected results raised several questions. Was some aspect of Vioxx increasing the risk of cardiovascular complications? Or, alternatively, was naproxen doing something similar to aspirin to prevent heart attacks? (Since the 1980s, many physicians had recommended taking low doses of aspirin to patients at higher risk for stroke and heart attack.) Dr. Ed Scolnick, president of Merck Research Labs, asked his scientists to undertake a thorough analysis not only of the VIGOR trial, but of all Vioxx trials and studies that had been completed to date. In addition, he initiated research on naproxen to learn about the drug s possible cardioprotective, or heart-helping, effects. Third, Scolnick wanted to investigate whether the population in the VIGOR trial patients with rheumatoid arthritis might be more prone to heart attacks than other patient populations. 18 To achieve these objectives, MRL scientists reanalyzed data from pre-fda approval studies of Vioxx. Their findings confirmed their initial conclusions: no statistically significant difference in cardiovascular events existed between Vioxx, placebo, and the comparator NSAIDs. 19 MRL then sought to determine whether Vioxx was causing adverse cardiovascular events or if naproxen was preventing them. To explore this hypothesis, Scolnick decided to unblind some data from an in-progress, placebo-controlled study investigating the possible use of Vioxx to treat Alzheimer s disease. The scientists collected cardiovascular data for treatment group A and treatment group B without knowing which group was taking Vioxx and which the placebo. 20 (Table B shows the partially unblinded results.) The trial s results did not indicate a statistically significant difference in cardiovascular risk for patients taking Vioxx versus a placebo Martin Report, Appendix E, p Martin Report, Appendix E, p Martin Report, Appendix E, p When these studies were concluded, it was revealed that Vioxx was Treatment Group A. 5

6 Merck: Managing Vioxx (A) Table B Summary of Serious Cardiovascular Adverse Events: Vioxx Protocols 091 and 078 Treatment Group A Treatment Group B N = 1050 N = 1050 n % n % All Cardiovascular Adverse Events % % Serious Adverse Events, such as heart attack and stroke % % Source: Adapted from Martin Report, Appendix E, p. 4. MRL next examined if naproxen, like aspirin, might have cardioprotective qualities. In their investigation, scientists at MRL uncovered only limited evidence to support the cardioprotection hypothesis for naproxen. No specific clinical trials had been conducted on the question, 22 but several articles and small studies indicated naproxen had some anti-clotting properties, similar to aspirin, when used continuously. Though scarce, the data offered some support for the naproxen cardioprotection theory. 23 The MRL scientists last set of analyses focused on the rheumatoid arthritis patients in the VIGOR trial. While some evidence showed that rheumatoid arthritis patients had an increased risk of cardiovascular disease, the data was not sufficient to explain the difference in cardiovascular events between patients taking Vioxx and naproxen. 24 Response to the VIGOR Trial When MRL s analysis of VIGOR and previous trials concluded in March 2000, Scolnick s MRL team and Merck s senior executives were satisfied as to the safety and efficacy of Vioxx. MRL submitted preliminary information to the FDA about the VIGOR trial on March 23, 2000, and issued a worldwide press release concerning VIGOR on March 27, (See Exhibit 3 for the press release.) In June 2000, Merck applied to the FDA for a Vioxx label revision to incorporate the VIGOR trial s findings, both regarding the drug s favorable GI profile and the possible cardiovascular risks associated with using Vioxx versus naproxen. The revised information if approved by the FDA would serve to warn both physicians and patients of potential adverse effects and highlight the perceived benefits of the drug. 25 Such a label revision would provide Merck with an important market advantage: none of Merck s competitors had proven that their drug increased GI safety versus non-selective NSAIDs (although this quality had been hypothesized as a class effect for Cox-2 inhibitors). As a result, no drug maker had been permitted by the FDA to claim increased GI safety on their product labels. The revised label for Vioxx was approved in April Martin Report, Appendix E, p Martin Report, Appendix E, p Martin Report, Appendix E, p For drug producers, the import of prescription drug labels extended beyond conveying information, such as dosage instructions, to consumers. Producers could only market drugs for uses approved by the FDA to be included on the drug label (i.e., relieving severe pain, reducing inflammation); therefore, the usages that drug producers were permitted to include in a prescription label could dramatically affect the drug s sales. 6

7 Merck: Managing Vioxx (A) Outlook In 2003, product development remained a top priority for Merck. The firm submitted two new drug applications to the FDA, but also discontinued two drugs in late-stage clinical trials due to safety and efficacy concerns. Adding to the company s performance pressure, the patent for Zocor, Merck s bestselling drug with $5 billion in annual revenue, was set to expire in In a move to cut costs and streamline the firm s focus, Merck laid off more than 4,400 employees. Vioxx contributed $2.5 billion in 2003 to worldwide sales. 26 Generating more than 91 million prescriptions in the U.S. alone, Vioxx had reached $2 billion in sales faster than any drug in Merck s history. 27 Sales growth had been slowing, however. In 2003, Vioxx posted only a 2% sales gain over 2002; Pfizer s Celebrex experienced similar limits to growth. The slowdown was attributed, in part, to the launch of Bextra Pfizer s next-generation Cox-2 inhibitor but also to fears over recurring cardiovascular warnings for Cox-2 inhibitors. Looking forward, executives at Merck speculated over the potential value that Vioxx could bring to the company and how competition and consumers concerns over cardiovascular risks might affect the drug s future sales. (See Exhibit 4 for Merck s product sales and Exhibit 5 for the firm s consolidated income statement.) 26 Vioxx sales had ranged from $2 billion to $2.5 billion since Merck and Co., Inc., 2003 Annual Report, p. 19; Ricardo Alonzo-Zalvidar, Vioxx Risks not Part of Sales Pitch, Files Reveal, Los Angeles Times, May 6, 2005, accessed November 20,

8 Merck: Managing Vioxx (A) Exhibit 1 Summary Financial Information, ($ millions except EPS and share price) Net sales 6,551 7,672 8,603 9,663 10,498 Net income (loss) 1,495 1,781 2,122 1,984 2,166 Market Value 30,644 34,781 64,354 49,651 43,104 Book Value 3,521 3,834 4,916 5,003 10,022 EPS a Share Price (High) Share Price (Low) Source: Standard and Poor s Compustat data via Research Insight, accessed July a EPS: Fully diluted, including extraordinary items. Exhibit 2 Summary Financial Information, ($ millions except EPS and share price) Net sales 14,970 16,681 19,829 23,637 26,898 32,714 Net income (loss) 2,997 3,335 3,881 4,614 5,248 5,891 Market Value 47,573 80,643 96, , , ,046 Book Value 11,139 11,736 11,971 12,614 12,802 13,242 EPS a Share Price (High) Share Price (Low) Source: Standard and Poor s Compustat data via Research Insight, accessed July a EPS: Fully diluted, including extraordinary items. 8

9 Merck: Managing Vioxx (A) Exhibit 3 VIGOR Press Release, March 27, 2000 Merck Informs Investigators of Preliminary Results Of Gastrointestinal Outcomes Study with VIOXX News Release WEST POINT, Pa., March 27, 2000 Merck & Co., Inc. today informed its investigators of a preliminary analysis from a large gastrointestinal (GI) outcomes study that compared Vioxx (rofecoxib) with naproxen in patients with rheumatoid arthritis. Among patients treated with Vioxx, there was a significantly reduced incidence of serious gastrointestinal events compared to patients treated with naproxen. Merck plans to submit the information to the U.S. Food and Drug Administration (FDA) and other regulatory agencies worldwide in the next few months. In addition, significantly fewer thromboembolic events were observed in patients taking naproxen in this GI outcomes study, which is consistent with naproxen s ability to block platelet aggregation. This effect on these events had not been observed previously in any clinical studies for naproxen. Vioxx, like all COX-2 selective medicines, does not block platelet aggregation and therefore would not be expected to have similar effects. As a result, Merck is notifying investigators, who are conducting other Merck studies with Vioxx or another investigational medicine in the same class, of protocol amendments to allow the addition of low-dose aspirin where appropriate. Patients using low-dose aspirin, which also blocks platelet aggregation, were excluded from the GI outcomes study. Vioxx does not interfere with the ability of low-dose aspirin to block platelet aggregation. The completed study, called VIGOR (Vioxx Gastrointestinal Outcomes Research) compared the GI safety of Vioxx (50 mg once daily) to prescription-strength naproxen (500 mg twice a day) in approximately 8,000 patients with rheumatoid arthritis. The study specifically assessed the incidence of certain types of clinically significant upper GI events, including perforations, ulcers, obstructions and bleeds. Naproxen is a commonly used non-steroidal anti-inflammatory drug (NSAID) indicated for the treatment of a number of arthritic diseases, including rheumatoid arthritis. Vioxx is not approved for the treatment of rheumatoid arthritis, nor is an application for this use under review. Vioxx is approved in the U.S. for the relief of the signs and symptoms of osteoarthritis, management of acute pain in adults and treatment of menstrual pain. Researchers believe that NSAIDs work by inhibiting two related enzymes: COX-1, the enzyme that helps maintain the stomach lining and promotes platelet aggregation, and COX-2, the enzyme that triggers pain and inflammation. At therapeutic doses, Vioxx works by selectively inhibiting COX-2 without inhibiting COX-1; non-selective NSAIDs like naproxen inhibit both COX-1 and COX- 2. Medicines like aspirin and naproxen that significantly inhibit COX-1 block platelet aggregation and therefore have the potential to provide cardioprotection. An extensive review of safety data from all other completed and ongoing clinical trials, as well as the post-marketing experience with Vioxx, showed no indication of a difference in the incidence of Thromboembolic events between Vioxx, placebo, and comparator NSAIDs. Further analyses are ongoing, and final results of the GI outcomes study with Vioxx will be presented at peer-reviewed medical meetings this year. 9

10 Merck: Managing Vioxx (A) Important information about Vioxx The recommended dose of Vioxx for the treatment of osteoarthritis is 12.5 mg once daily. Some patients may receive additional benefit by increasing the dose to 25 mg once daily. Serious stomach problems, such as bleeding, can occur without warning symptoms. Administration of low-dose aspirin with Vioxx may result in an increased rate of GI ulcers or other complications compared to use of Vioxx alone. Physicians and patients should remain alert for signs and symptoms of gastrointestinal bleeding. Common side effects reported in osteoarthritis clinical trials with Vioxx were upper-respiratory infection, diarrhea, nausea and high blood pressure. People who have had an allergic reaction to Vioxx, aspirin or other NSAIDs should not take Vioxx. Safety and effectiveness in children below the age of 18 have not been studied. Merck & Co., Inc. is a global, research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care. Source: Martin Report, Appendix E, p

11 Merck: Managing Vioxx (A) Exhibit 4 Merck Product Sales by Category, ($ millions) Product Category * Atherosclerosis (elevated cholesterol) a 5, , , ,077.9 Hypertension/Heart Failure b 4, , , ,421.6 Anti-inflammatory/analgesics c 2, , , ,677.3 Osteoporosis d 1, , , ,676.6 Vaccines/biologicals , , ,056.1 Respiratory , , ,009.4 Antibiotics/anti-fungal ,028.5 Ophthalmologicals Anti-ulcerants/Urology Human immunodeficiency virus (HIV) Other Merck products 1, , ,967.3 Merck-Medco 20, , , Total Sales $40,363.2 $47,715.7 $51,790.3 $22,485.9 Total Sales Excluding Merck-Medco 20, , , ,485.9 Source: Adapted from Merck Annual Reports. *Merck spun out Merck-Medco, its pharmacy benefit management division, in a Products include Zocor and Mevacor. b Products include Vasotec, Cozaar, Hyzaar, Prinivil and Vaseretic. c Vioxx generated approximately 90% of the revenue in this category. d Fosamax is the only product in this category. Exhibit 5 Merck Consolidated Income Statement, ($ millions) Income/Expenses a Materials & Production 22, , , ,315.3 Marketing & Administrative 6, , , ,394.9 Research & Development 2, , , ,178.1 Equity income from affiliates (764.9) (685.9) (644.7) (474.2) Other (income) expense, net (221.1) Total Expenses 30, , , ,193.0 Income from continuing operations before taxes 9, , , ,292.9 Taxes on income 3, , , ,462.0 Net Income 6, , , ,830.9 Source: Adapted from Merck Annual Reports. a Merck spun out Merck-Medco, its pharmacy benefit management division, in