Merck hires an unknown to resolve identity crisis: Larry Black on the sudden and heady rise of a minnow with no experience of the drug industry

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THE parting present to Merck of Dr Roy Vagelos, who has dominated the drug colossus for almost two decades, was a surprise choice of successor.

When Merck's chief executive gave up his roles of president and chief executive on 17 June - he will also step down as chairman when he finally retires in November - he handed on the baton to Raymond Gilmartin, the 53-year- old chief executive of Becton, Dickinson and Company, a hospital-supply company a fifth the size of Merck.

Wall Street was stunned - 'a total outsider' was the most common reaction - as was the healthcare industry, particularly at the haste with which Mr Gilmartin, a man with no drug industry experience, was installed in office.

Mr Gilmartin's selection by a committee of Merck directors comes after a series of false starts that caused two leading contenders, Richard Markham and John Zabriskie, to resign to take jobs heading two Merck rivals, Marion Merrell Dow and Upjohn.

It also ends what appears to have been an identity crisis at the giant prescription drug maker. Facing the tough new environment of 'managed competition' in American medicine, Merck and Dr Vagelos - a scientist - seemed to have been torn between the group's research-driven past and the marketing strategies that now dominate the industry.

Mr Markham, his designated heir when Dr Vaglos announced his retirement plans in December 1992, was an aggressive salesman with no research background, promoted over the heads of a half- dozen or more senior executives.

Although a controversial choice within Merck, Mr Markham at least would have been an insider at the 103-year-old company.

Until a few weeks ago, Dr Vagelos seemed to be considering a radical candidate in Martin Wygod, the 54-year-old former chief executive of Medco Containment, the discount drug retailer Merck acquired last year for dollars 6.6bn ( pounds 4.4bn).

Some industry reformers believe Mr Wygod, a former corporate raider, was just the man to follow through on the task, having built Medco in 10 years from a small mail house serving pensioners into a force whose buying clout transformed the drug industry.

But at Merck's annual meeting in late April, in an acknowledgment that entrepreneurial skills were not sufficient to run a company that size, Dr Vagelos announced that Mr Wygod, the firm's largest individual shareholder, had resigned as head of sales, and was out of the running for his job.

Mr Gilmartin is another veteran of the managed-care revolution, but he brings different skills to the job, having accomplished what many believed to be an impossible turnaround at Becton Dickinson in his four years as chief executive. Long before the big pharmaceutical firms began to feel pricing pressure from US healthcare buyers, firms supplying medical commodities such as rubber gloves, syringes and catheters faced fierce foreign competition and cost-cutting demands from hospital groups. More than 80 per cent of Becton Dickinson's US sales are to organised buying groups.

Mr Gilmartin, a Harvard MBA who was trained as an electrical engineer, proved an adept and innovative manager during his 18 years at Becton Dickinson, slashing production costs while moving the firm upmarket into higher- margin diagnostic products.

And although he is known in the industry as a consensual manager, he succeeded in stripping away layers of management, allowing the company to respond to the persistent demands of its increasingly activist customers.

Profit margins have held up despite the wrenching restructuring - hardly the case at Merck, which has seen the heady growth in earnings it enjoyed in the late 1980s when profits were rising by more than 30 per cent a year - squeezed to about 10 per cent.

Mr Gilmartin also confronted his overseas competitors on their own turf; foreign sales accounted for about 45 per cent of Becton Dickinson's dollars 2.5bn in annual revenues last year, roughly the same as Merck's.

Mr Gilmartin's biggest short- coming is his lack of experience in drug development, the extended high-stakes gamble involved in discovering and testing a new treatment.

For example, Merck, which regards itself primarily as a pill maker, is already paying the price for its late decision to enter bio- technology, which in the early 1980s was seen as more likely to yield injectable drugs.

As a result, Mr Gilmartin is taking control of a dollars 15bn company whose pipeline of dollars 1bn-a-year drugs is running considerably slower than it once was. But Merck's directors agreed that fresh thinking about the whole drugs business by an executive who has dealt successfully with managed- care customers was far more important than research experience.

'I've already been through the kind of changes that are now starting to affect the pharmaceuticals companies,' the understated Mr Gilmartin said recently.

He brings another important advantage to the job, Wall Street analysts say: because he doesn't come from a Merck competitor, his restructuring plans may be better accepted within the company.

At the same time, it is not at all clear that Mr Gilmartin's immediate actions will be any more jarring than the surprises Dr Vagelos has visited on the company in the past 18 months. While Mr Gilmartin educates himself about the drug industry over the coming months, he seems content to allow bold experiments such as the Medco acquisition to play themselves out.

'Following through on the strategy already started is the top priority,' he says.

(Photographs omitted)

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