Merck Succession Plan: Board Wants “Internal” Successor, CEO Says

Merck is focusing on internal candidates to succeed CEO Ray Gilmartin when he retires in 2006, Gilmartin told analysts during Merck's annual business briefing in Whitehouse Station, N.J. Dec. 9.

"The emphasis is, and the priority is, to have an internal successor," Gilmartin said. "That is fully the intention of the board, and my intention as well."

The board wants to avoid the "disruption" inherent in bringing someone from outside the company, Gilmartin said, noting his own experience when he joined Merck from Becton Dickinson in 1994 to succeed Roy Vagelos as CEO.

"Given the fact that I was brought in from the outside, and the key members of the board were part of that search committee and remember...what kind of disruption occurs when you don't have somebody internal...clearly the preference is an internal candidate," he said.

Unlike his predecessor, Gilmartin has not openly groomed younger executives for the top position. Vagelos had a large cadre of potential successor candidates, many of whom have gone on to senior management positions at other companies.

Vagelos ultimately selected Richard Markham as president and heir apparent; however, Markham left Merck abruptly just six months after taking the new position. He is now chief operating officer of Aventis.

Although the board may wish to avoid the disruption of choosing an outsider to succeed Gilmartin, the open discussion of the succession process means that the company may face a period of distraction before the transition begins.

The discussion of Merck's succession planning comes at a low point for the company during Gilmartin's tenure - and after calls for his removal as CEO were widely reported in the business press.

During the Vagelos transition process, Merck was pleased that it at least avoided a prolonged period of public attention to the lack of clear successor as the CEO approached mandatory retirement age.

Gilmartin maintained that Merck's succession planning is well under way. "You don't start working on this thing with only two years to go," Gilmartin said. "You start well in advance of that and put in place a management team, the members of which have the potential - more than one - to...become the next CEO."

"We have two and a half years to go, in terms of timing of announcements," he said. "I don't want to make any particular commitments right now, but certainly, you'd like to have a CEO in place, basically at a point certainly just prior to that...at the latest."

Merck presumably wants to have a successor identified well before that time to ensure that the new management team can focus on business challenges rather than transition issues. Gilmartin's retirement date comes just before the Zocor patent expiration and just after the new Medicare prescription drug benefit begins.

If Merck plans to designate an heir apparent in the near term, the participants in the company's 2003 business review are likely to represent the pool of candidates. There is probably not enough time to introduce a new executive to investors before a selection must be made.

Four execs other than Gilmartin made formal presentations during the Dec. 9 meeting: CFO Judy Lewent; Merck Research Labs President Peter Kim, PhD; U.S. Human Health President Bradley Sheares, PhD; and Merck Manufacturing Division President Richard Clark.

One notable absence from the list of presenters was Merck Human Health President David Anstice. One of Gilmartin's first executive appointments in 1994 was naming Anstice head of U.S. Human Health.

Anstice, 55, has since been a fixture at investor meetings. However, his operational responsibilities have been reduced, with responsibility for the Americas divided between Sheares (primary care) and Margaret McGlynn (hospital/specialty products).

Anstice now oversees Merck's business in Japan, Canada and Australia, as well as the Zetia joint venture with Schering-Plough.

The four execs who did present during the conference each offers a different profile for the Merck board to consider, and each highlights different aspects of the business challenges facing the company.

CFO Judy Lewent: As Merck's top finance exec since 1990, Lewent is very familiar to analysts and investors and is likely to be the primary focus of speculation in the business community.

Lewent, 54,was considered a candidate for the post when Vagelos retired, but the board opted to go in a different direction.

Since that time, Lewent has overseen most of Merck's joint ventures and received credit inside and outside the company for making the $6.6 bil. Medco acquisition pay off well ahead of schedule.

She assumed responsibility for licensing activities in 2000 and Human Health-Asia in 2003. Her appointment to CEO would underline Merck's growing interest in external deals and Far East markets, especially Japan (see ¹ (Also see "Merck Drops Strict “No Merger” Policy, But Still Prefers Licensing Deals" - Pink Sheet, 15 Dec, 2003.)).

One potential drawback in selecting Lewent, however, may be whether investors will hold her responsible for Merck's inability to meet earnings forecasts over the past three years. Most recently, Merck said it will not make its double-digit guidance for 2003 (² (Also see "Merck Sees Strong Cholesterol Market In ‘04; Zocor Growth, Profit From Zetia" - Pink Sheet, 8 Dec, 2003.), p. 14).

U.S. Human Health President Bradley Sheares: At 46, Sheares would represent a generational transfer of power within Merck. Sheares has been head of U.S. primary care sales since 2001, after moving up through the ranks of the hospital sales side of the business.

He also has more familiarity with the R&D side of the business than his marketing background might suggest. Sheares has a PhD in biochemistry and actually joined Merck in 1987 as a research fellow.

Sheares' presentation during the Dec. 9 business review touched on all aspects of Merck's business, including the potential impact of the Medicare legislation.

Merck Research Labs President Peter Kim: The selection of Kim, 45, would signal a desire by the board to return to the Vagelos model of CEO. Vagelos was head of R&D before taking the CEO slot.

Kim, however, is a relative newcomer to Merck and to the pharmaceutical industry. He joined the company from the Massachusetts Institute of Technology/ Whitehead Institute in 2001 (³ (Also see "Merck R&D Labs Heir-Apparent Kim To Head Basic Research, Clinical Science" - Pink Sheet, 11 Dec, 2000.), p. 19).

The board opted against former Research Labs President Edward Scolnick when it was choosing a successor to Vagelos.

Manufacturing Division President Richard Clark: The selection of Clark, 57, would indicate that Merck wants to stress operational efficiency in the near term.

Clark spent 25 years in the Merck manufacturing division, moving up to head North American operations. During that time, Merck established an enviable record for GMP compliance in the U.S.

In 1997, he joined the Medco pharmacy benefit management division and was named CEO of the business in 2000.

Within Merck, he is credited with ramping up the efficiency and automation of the Medco mail order operations and in setting up the company as an attractive spin-off candidate. He returned to head the manufacturing division ahead of the Medco spin off this year (⁴ (Also see "Medco Health Valued At $6 Bil. Heading Into Aug. 19 Spin-Off" - Pink Sheet, 11 Aug, 2003.), p. 28).

Merck has defined its ability to manage costs as a key strength, and Clark's presentation focused on new efficiency efforts.

The culture of efficiency at Medco is being challenged by the U.S. Attorney's Office in Philadelphia in a False Claims Act suit against the company. However, the case does not name Merck or Clark as defendants.

Several other members of the Merck management committee may be considered CEO candidates.

Senior VP/General Counsel Kenneth Frazier, 48, oversees Merck's public affairs and government relations operations. The company made an early commitment to the Medicare drug benefit, and Frazier may be credited with the success of that strategy.

U.S. Human Health President Margaret McGlynn, 44, is the newest member of the management team and, as the executive responsible for managed care sales, will play a key role in Merck's approach to the Medicare benefit.

Human Health-Europe, Middle East & Africa President Per Wold-Olsen, 56, has addressed Merck investor meetings in the past, but did not make presentations at the 2003 event.