[lou_lou]

Regime change has been great for Merck--and it's good for the U.S. drug industry, too.
It's winter in the U.S. pharmaceutical industry. The newly Democratic Congress wants to give Medicare more power to negotiate prices and tighten drug safety. Only 26 medicines or vaccines passed approval at the U.S. Food & Drug Administration last year, half as many as a decade ago, despite $40 billion spent on research and development. But one pharma giant--the one everybody loved to hate a year ago--managed to launch five products in 2006, generating a new book of business that should yield $2 billion this year.

That success story is Merck (nyse: MRK - news - people ). Sure, its heart-stopping Vioxx pill still poses one of the scariest liabilities ever. Plaintiff attorneys have filed 27,000 wrongful death suits since Vioxx was yanked from the market two years ago. Merck has won 9 of 13 trials (one win was overturned and sent back for a new trial) and has boldly refused to set aside settlement money. But if cases start going badly Merck could end up worse than Wyeth (nyse: WYE - news - people ), which has set aside $21 billion for damage done by its Redux fat pill.

But Vioxx was exactly what Merck needed. It led to the ouster of its ineffectual chief executive, Raymond Gilmartin. His surprise successor, a little-known Merck lifer named Richard Clark, was given carte blanche to turn the company around. Under Clark this prideful colossus of bureaucratic silos has become more open to criticism, nimbler and hungrier. It has two new hits in Gardasil, its new vaccine to prevent cervical cancer, and Januvia, which is already outperforming many older diabetes drugs. Fifty-seven new compounds are in human testing, triple the size of its disclosed pipeline in 2002. The labs are churning out potential treatments for obesity, osteoporosis and HIV.

In just under two years Merck's shares are up 38%, more than any rival's. "Merck is busy with a revival," says John J.P. Kastelein, a cardiologist at the University of Amsterdam who has consulted for Merck. "I found Merck a nasty, arrogant company that was hard to work with, cheap on the clinical trial side, with a mediocre track record. That is definitely changing."

Regime change is working across Big Pharma. Pfizer (nyse: PFE - news - people ) ousted Henry McKinnell after he failed to deliver good returns. His replacement, Jeffrey Kindler, has managed a 3% stock bump since he took the job, even though he oversold its cholesterol drug torcetrapib, a colossal failure. Also undergoing a brain transplant is Bristol-Myers Squibb (nyse: BMY - news - people ), which fired serial blunderer Peter Dolan and is still looking for a permanent replacement.

New chiefs can fix drug companies quicker than you'd think. Daniel Vasella turned Novartis (nyse: NVS - news - people ) from an underperforming combination of two Swiss drugmakers into a generic-drug powerhouse and a fleet marketer of expensive but targeted cancer drugs. Fred Hassan, who fixed up Pharmacia and sold it to Pfizer for $60 billion, has stabilized Schering-Plough (nyse: SGP - news - people ) after replacing the overpaid Richard Kogan. Its stock is up 42% since 2003.

All eyes are now on Merck's Clark. He and his two talented lieutenants, Peter S. Kim (chief of research) and Peter Loescher (chief of just about everything else), have made impressive changes in a short time. Merck was as insular as any big drug company, and was widely criticized for denying Vioxx's heart problems. The big changes, says Kim, are that Merck is giving lower-ranking employees more say, and dissent is far more encouraged.

Merck's former research head, Edward Scolnick, had such a sharp tongue--he called FDA officials "bastards" during Vioxx label talks--that new ideas weren't easily voiced. "If you don't have an environment where people can speak up, you're not going to be a well-run organization," says Kim, 48.

Merck's labs now work across research disciplines more frequently, cooking up unlikely ideas. The cardiovascular and respiratory divisions never spoke much to one another, but a scientist in the Canadian cardio group borrowed an experimental asthma drug that managed to eliminate the severe hot flashes caused by niacin. Niacin was always known to raise good cholesterol and appears also to prevent heart attacks. The drug, prescribed in tandem with unpatented niacin, could hit the market next year and reach $1 billion in sales in 2010.

With the asthma-turned-cardio drug Merck is showing a willingness to test new drugs more fully, a criticism it suffered with Vioxx and its Zetia cholesterol drug. Before this drug wins approval, Merck will put it into 20,000 patients for a risk trial that should finish by 2011.

A newly venturesome Merck paid $1.6 billion last year for three biotech companies, none of which has drugs close to market. Sirna Therapeutics (nasdaq: RNAI - news - people ) owns patents in the once-rejected but 2006 Nobel Prize-winning field of "gene-silencing." GlycoFi is making advances toward much cheaper production of protein drugs in yeast.

Loescher, 49, is charged with doing for the rest of Merck what Kim has done in the labs. Hired in April, he is seen as a likely successor to Clark. The imposing Austrian left pharma in 2002 and was on a fast track at General Electric (nyse: GE - news - people )--until he heard that it was Merck calling. He thinks Merck has the potential to return to its glory days.

Merck is reducing head count across the board, but Loescher believes he can get more return out of who's left. He reorganized worldwide sales teams around disease areas instead of geography. He talks of using video clips to educate doctors about medicine. He notices a reporter's iPod and says he can use that to sell medicines. "The iPod generation is probably the next one we'll target," Loescher muses. "You say, 'No, I don't want to sit in front of a computer, I would like to sit on the beach and watch my podcast.'"

Merck's brass used to meet mostly at its lush, wooded headquarters in Whitehouse Station, New Jersey. Loescher has taken them on the road. In December he and his direct reports spent a week in China. On Jan. 18 they are off to Japan. The best way to understand the challenges and opportunities of these regions is to see them firsthand.

Just because Merck is touting experimental drugs does not mean they will succeed. The failure of Pfizer's much-hyped drug to raise good cholesterol is a reminder that things don't always work the way companies want them to.

But Pfizer and Bristol-Myers Squibb, one with a new boss and the other still looking, had better be taking notes.


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Patent infringement and other lawsuits drove some premarket trading Monday, including a suit that a Bear Stearns analyst says is turning toward drug developer Amgen Inc.'s favor.

Shares of Amgen Inc. (nasdaq: AMGN - news - people ) added $1.81, or 2.4 percent, to $76.06 in premarket trading after new court documents filed late Friday were interpreted in favor of Amgen.

Amgen is suing Roche Holdings Ltd. for infringement regarding a competing anemia drug to Amgen's Epogen and Aranesp, which generate significant revenue. The Roche rival drug is nearing an expected approval.

Analyst Mark Schoenebaum in a client note dated Sunday reiterated an "Outperform" rating on Amgen and lifted his target price to $83 from $77.

He said the new court documents say Roche's drug has the same "amino acid sequence and composition" as elements in Amgen's drug.

"If the market fully digests this development, we believe AMGN shares could trade up sharply today," wrote Schoenebaum.

Shares of Amgen closed at $74.25 on the Nasdaq Friday.

Star Scientific Inc. (nasdaq: STSI - news - people ) shed 42 cents, or 25 percent, to $1.28 in premarket trading after the maker of tobacco products said it will cut costs and could sell some assets while it appeals a patent infringement lawsuit against R.J. Reynolds Tobacco Co.

Star in 2001 sued R.J. Reynolds Tobacco, which is a unit of Reynolds American (nyse: RAI - news - people ) Inc., for infringing on its process to reduce cancer-causing toxins in tobacco.

A judge ruled in favor of R.J. Reynolds on Jan. 19. Star said it could sell some or all of its tobacco curing barns to reduce debt, and may make cuts in salaries and other areas.

Shares closed at $1.70 Friday on the Nasdaq.

Shares of Discovery Laboratories Inc. (nasdaq: DSCO - news - people ) added 37 cents, or 14.5 percent, to $2.92 in the premarket after the drug developer said the Food and Drug Administration provided it with guidance on how to improve chances of getting its Surfaxin lung treatment approved.

The FDA in April told the biotech it wanted more information on the proposed treatment for respiratory distress syndrome in premature infants.

Shares closed at $2.55 Friday on the Nasdaq.

XM Satellite Radio Holdings Inc. (nasdaq: XMSR - news - people ) fell 34 cents, or 2.2 percent, to $15.38, after a judge ruled that a lawsuit alleging the company is cheating record companies has merit and should continue.

The suit, filed by Atlantic Recording Corp., BMG Music, Capitol Records Inc. and other music distribution companies, contends that XM Satellite infringes on their exclusive distribution rights by letting consumers record songs.

Shares of XM Satellite closed at $15.72 Friday on the Nasdaq and have recently seesawed due to speculation that it might merge with rival satellite radio operator Sirius Satellite Radio Inc. (nasdaq: SIRI - news - people ) Sirius shed 4 cents to $3.92 in premarket trading.

Shares of Patterson-UTI Energy Inc. declined 81 cents, or 3.4 percent, to $22.80 in the premarket after the oil and gas company said it expects fourth-quarter earnings to miss Wall Street estimates.

The onshore drilling contractor pointed to a decline in oil drilling activity during the quarter.

The stock closed at $23.61 on the Nasdaq Friday.

Swift Transportation Co. (nasdaq: SWFT - news - people ) added $2.46, or 8.9 percent, to $30.20 in premarket trading after company founder Jerry Moyes said he will pay $31.55 per share, or $2.74 billion, to take the trucking company private.

While the deal has board approval, it still needs the green light from shareholders and could be finalized in the second 2007 quarter.

Shares closed at $27.74 Friday on the Nasdaq.