Merck CEO Resigns/Tax Break for Drugs Cos/Merck Drug Rep training

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Merck CEO Resigns/Tax Break for Drugs Cos/Merck Drug Rep training

Wed, 11 May 2005 14:59:14 +0100

 

 

washingtonpost.com

Merck CEO Resigns as Drug Probe Continues

House Panel Critical Of Vioxx Sales Tactics

 

By Marc Kaufman

Washington Post Staff Writer

Friday, May 6, 2005; A01

 

Merck & Co.'s longtime leader Raymond V. Gilmartin abruptly resigned

yesterday on the same day congressional investigators released a slew

of documents detailing how the company continued to aggressively

promote its arthritis drug Vioxx after it knew of potentially serious

safety concerns.

 

The documents made public by the House Committee on Government Reform

showed that Merck directed its 3,000-person Vioxx sales force to avoid

discussions with doctors about the cardiovascular risks identified in

a major clinical trial of the drug in 2000. Sales representatives were

told instead to rely on a " Cardiovascular Card " that said Vioxx was

protecting the heart rather than potentially harming it.

 

Vioxx was withdrawn from the market last September after another

clinical trial found that people who had taken the drug for 18 months

were five times more likely to have heart attacks and strokes than

those on a placebo. The withdrawal tarnished Merck's reputation and

cost the firm billions in sales, stock value and legal fees.

 

The company, which had earlier said Gilmartin, 64, would stay in place

until his scheduled retirement next year, said his sudden departure as

chairman, president and chief executive officer had nothing to do with

the Vioxx controversy. Merck named its president for manufacturing,

Richard T. Clark, to replace Gilmartin as chief executive officer and

president.

 

The resignation of Gilmartin, after he spent 11 years at the helm,

came on a day when Merck was sharply criticized in a hearing into how

the company and the Food and Drug Administration had handled the

safety concerns surrounding Vioxx.

 

Merck and other drug companies say their " detailers " act as neutral

educators to guide physicians in prescribing drugs, but the more than

20,000 pages of documents released yesterday showed that Merck's

representatives were coached to be aggressive salesmen.

 

They were trained how to smile, speak and position themselves most

effectively when talking with doctors, and were exhorted to sell Vioxx

and other Merck drugs using the Rev. Martin Luther King Jr.'s " I Have

a Dream " speech.

 

Rep. Elijah E. Cummings (D-Md.) read from a Merck training manual that

directed instructors to play a recording of the speech and then say to

the sales force: " King was someone with goal-focus -- he kept getting

shut down but kept going. . . . Just as with a physician, you must

keep repeating the compelling message and at some point, the physician

will be 'free at last' when he or she prescribes the Merck drug, if

that is most appropriate for the patient. "

 

" Merck says the mission of its sales force is to educate doctors, "

said Rep. Henry A. Waxman (Calif.), the panel's ranking Democrat.

" This sales force is given extraordinary training so that it can

capitalize on virtually every interaction with doctors. Yet when it

comes to the one thing doctors most need to know about Vioxx -- its

health risks -- Merck's answer seems to be disinformation and censorship. "

 

Dennis Erb, Merck's vice president for global regulatory development,

said that company's actions were timely and appropriate, and that

detailers were trained to be " accurate and balanced " in presenting

information. He said Merck has conducted 70 clinical trials on Vioxx

involving more than 40,000 patients, and the company is discussing

with the FDA whether to apply for approval to resume marketing the drug.

 

" We believe Merck acted appropriately and responsibly to extensively

study Vioxx after it was approved for marketing to gain more clinical

information about the medicine, " he said. " And we promptly disclosed

the results of these studies to the FDA, physicians, the scientific

community and the media. "

 

Erb defended Merck's policy of instructing its representatives not to

tell doctors about the troubling cardiovascular results from a large

2000 clinical trial called Vigor. Until it withdrew Vioxx, Merck had

argued that naproxen -- the control drug in the 2000 trial -- lowered

cardiovascular risks, not that Vioxx raised them.

 

Erb said the FDA had not approved adding the trial results to the drug

label and so they could not be discussed except by senior officials.

But Erb acknowledged that the company did allow drug representatives

to say that the 2000 trial had established that Vioxx helped reduce

gastrointestinal bleeding. That policy led some congressmen to accuse

Merck of disclosing the good news about Vioxx but hiding the bad.

 

Rep. Gil Gutknecht (R-Minn.) joined Democrats on the committee in

sharply questioning Merck and the FDA. " It seems to me there's a

disconnect here, " he said. " You're saying your policies are legal, but

are they ethical? Isn't this the scandal? "

 

A 2004 study by FDA safety officer David Graham and others estimated

that Vioxx caused as many as 140,000 heart attacks and strokes and

killed as many as 55,000 people. Vioxx, which was approved by the FDA

in May 1999, reached $2 billion in sales in two years, faster than any

drug in Merck's history.

 

The FDA's Steven Galson, acting director of the Center for Drug

Evaluation and Research, also came under criticism for the agency's

handling of the Vioxx case, especially for the substantial lag time

before the worrisome cardiovascular data from the 2000 trial were

added to the drug's label. Galson said the agency had learned through

the Vioxx episode that it should give doctors and patients more

information about drugs as the incomplete research results come in.

 

" The most important lesson . . . is that the American public,

practitioners and patients want to get clear and accurate information

as early as possible so they can participate in their own health care

decisions, " Galson said.

 

The hearing also explored previously reported efforts by Merck to

" neutralize " doctors who had concerns about Vioxx's safety by paying

them to take part in clinical trials and offering grants and

consultancies. Merck officials said their efforts were designed to

dispel misinformation about their product.

 

Until the Vioxx debacle, Gilmartin and Merck were highly regarded in

the pharmaceutical industry. Gilmartin was a pioneer in providing

cheap or free AIDS drugs to Africa, and Merck was long considered one

of the most ethical -- and profitable -- companies. Since Sept. 30,

the company has lost one-third of its stock value.

 

In a conference call yesterday, Lawrence A. Bossidy, the new chairman

of the Merck board's executive committee, said of Gilmartin, " In no

way did we push him out. " He said the company decided it was " time for

change. "

 

Gilmartin's successor, Clark, 59, has been president of Merck's

manufacturing division, which operates plants in 25 countries. Clark

also served as chief executive of Medco Health Solutions Inc., one of

the country's biggest managers of prescription drug programs.

© 2005 The Washington Post Company

_____________________________

 

http://www.nytimes.com/2005/05/08/business/08taxes.html

New York Times

 

May 8, 2005

 

Drug Makers Reap Benefits of Tax Break

 

By ALEX BERENSON

 

A new tax break for corporations is allowing the biggest American drug

makers to return as much as $75 billion in profits from international

havens to the United States while paying a fraction of the normal tax

rate.

 

The break is part of the American Jobs Creation Act, signed into law by

President Bush in October, which allows companies a one-year window to

return foreign profits to the United States at a 5.25 percent tax rate,

compared with the standard 35 percent rate.

 

Any company with profits in other countries can take advantage of the law,

but drug makers have been the biggest beneficiaries because they can move

profits overseas relatively easily, independent analysts say.

 

The money the companies are bringing home has come from many years of

using

legal loopholes in the tax law to aggressively shelter their profits from

United States taxes, tax lawyers say. While the companies' tax returns are

private, fragmentary information about their tax payments is buried inside

their annual financial statements.

 

Those figures show that the drug makers have told the Internal Revenue

Service for years that their profits come mainly from international sales,

even though the prices of medicines are far higher in the United

States and

almost 60 percent of their sales take place in America.

 

Representatives of most of the big drug companies declined to com-ment

beyond their annual reports, but in a statement Eli Lilly noted that

several factors depressed its United States profits. Pfizer said it was

following the intent of the law.

 

Though the companies stand behind their accounting, financial analysts and

tax lawyers say that the drug makers' claim defies reality and that their

profits come mostly from sales in the United States. But the I.R.S. lacks

the resources to challenge the companies effectively, the analysts and

lawyers say. As a result, the six major companies - Pfizer, Johnson &

Johnson, Merck, Bristol-Myers Squibb, Wyeth and Lilly - collectively pay a

federal tax rate of less than 15 percent on their worldwide profits, with

some companies paying much less.

 

Already, four of the six drug makers have collectively announced plans to

return $56 billion in profits to the United States. Two others say

they are

still considering but could repatriate an additional $18 billion. Had the

six companies faced standard federal taxes on those profits, they would

have paid $26 billion to the United States. Instead, they will pay less

than $4 billion. Chris Senyek, an accounting analyst at Bear Stearns, said

drug companies would probably make up about half of all the money

repatriated by publicly traded companies.

 

During this window, returning money to the United States is to the

advantage of the companies because they can spend the cash here rather

than

having to use it overseas as tax laws generally require. Lawmakers have

said their main intention for the law was to encourage American companies

to build new operations and hire workers. Congress passed the law in

response to pressure from the European Union to resolve a long-running

trade dispute.

 

Although the act is intended to create jobs, Pfizer said last month

that it

would cut its annual costs by $4 billion over the next three years.

Pfizer,

which will repatriate at least $28 billion under the act, did not say how

many jobs it planned to eliminate, but analysts expect the company to

shrink its work force by thousands of people. Mr. Senyek said the law

would

create an insignificant number of jobs because companies can easily work

around provisions in the law meant to stop them from using the money for

dividends to shareholders rather than new hiring.

 

After the break expires, companies will probably go back to stockpiling

profits overseas as they wait for another tax holiday in a few years, tax

lawyers say.

 

The major drug makers use a variety of complex but legal tactics to move

profits from the United States to low-tax countries like Ireland and

Singapore where they have large manufacturing operations, said H. David

Rosenbloom, director for the international tax program at New York

University Law School.

 

" The law is complicated, but what's going on is perhaps less complicated, "

he said. " They're doing everything they can to maximize their profit in

Ireland and minimize the profit in the countries where the sales occur. "

 

The government can challenge the way the companies allocate their profits

internally. But the companies have usually been able to defeat the I.R.S.,

Mr. Rosenbloom said.

 

" There's a limit to what they can do, because these cases are huge.

They're

very expensive, " Mr. Rosenbloom said of the I.R.S.

 

The companies declined to discuss the specific strategies they use to

minimize taxes. But the result of their efforts can be seen in a

remarkable

set of figures inside their annual financial reports.

 

Pfizer, the world's largest drug company, said that in 2004 it had only

$4.4 billion in pretax profits in the United States, compared with $9.6

billion internationally, though most of its sales came in the United

States. The company says that its profit margins on international sales

were almost three times as high as on American sales.

 

Other companies reported similar trends. The biggest imbalance occurred at

Eli Lilly, which reported that it had about $200 million in profits from

United States sales in 2004, compared with $2.8 billion in profits from

sales everywhere else.

 

Because they report relatively low United States profits, the

companies pay

little in American taxes compared to their profits. Pfizer reported paying

only $1.2 billion in state and federal income taxes in 2004, 9 percent of

its worldwide pretax profit. Excluding a one-time payment related to its

plans to repatriate money it has sheltered overseas, Lilly reported paying

just $37 million in state and federal taxes last year, only 1 percent of

its worldwide pretax profit.

 

In its statement, Lilly said product liability suits, one-time charges

related to business restructurings, increased pension expenses and

research

and development costs all cut into profits here, the company said.

 

" The intent of this legislation is to encourage companies to invest income

earned outside the U.S. in their U.S. operations, " Pfizer said in a

statement. " That is what Pfizer and more than 300 other U.S.-based

companies are doing. "

 

Collectively, the six drug makers paid about $6 billion in federal and

state taxes, a fraction of their pretax worldwide profits of $43 billion.

Johnson & Johnson accounted for about half the American taxes paid. It

garners more than half of its sales from consumer products and medical

devices, whose profits are harder to transfer overseas.

 

The companies' assertions that they are more profitable overseas than in

the United States is hard to believe, said Dr. Alan Sager, director of the

health reform program at the Boston University School of Health.

 

Prescription drug prices are far higher in the United States than in other

industrialized countries, where prices are generally

government-controlled.

 

In one typical example, a three-month supply of 40-milligram tablets

Lipitor, a cholesterol-lowering medicine from Pfizer, costs $305 at

Walgreens.com, the Internet site for the largest United States

pharmacy. An

Internet pharmacy in Canada lists the same medicine for $174.

 

" I'm really at a loss to find a reasonable explanation for the phenomenon,

a real-world explanation, " Dr. Sager said. Outside the United States,

" there just doesn't seem to be any place on earth for the high profits to

be generated, which leaves us with the extraterrestrial options. "

 

Wall Street analysts who follow the pharmaceutical industry also say most

of the drug makers' profits come from the United States.

 

David Moskowitz, an analyst at Friedman, Billings, Ramsey, estimated that

at least 60 percent of the drug industry's worldwide profits come from the

United States. Higher American drug prices more than make up for higher

marketing costs here, he said. Other analysts estimate that as much as 75

percent of the industry's worldwide profits are generated in the United

States.

 

But companies can hide those profits from the I.R.S. by moving their drug

manufacturing overseas, said Martin A. Sullivan, contributing editor

of Tax

Notes, a nonprofit journal that examines tax issues. Companies transfer

drug patents to their own foreign subsidiaries, he said.

 

The subsidiary then helps pay for research on the drug. If the medicine is

approved for sale in the United States, the subsidiary manufactures the

drug for a few cents a pill.

 

The pills are then shipped to the United States, where they are sold to a

pharmacy or a wholesale company for several dollars each. But the parent

company claims that almost all the profit should go to the subsidiary, not

to the parent in the United States.

 

" Then the name of the game is to have that foreign subsidiary pay as

little

as possible back to the United States for the rights to all that income, "

Mr. Sullivan said.

 

The law will encourage drug makers to become even more aggressive about

shifting American profits overseas because the companies will assume that

they can lobby Congress for another tax holiday in a few years, said

Sheldon Cohen, senior counsel at Morgan, Lewis & Bockius.

 

" I've always been against tax holidays or amnesties on the basis that

if we

do this, it tells companies or individuals that we'll do it again, " Mr.

Cohen said.

__

 

Merck training strategy was to mould the 'whole' sales rep

Sunday, May 08, 2005

BY GEORGE E. JORDAN

Star-Ledger Staff

http://www.nj.com/business/ledger/index.ssf?/base/business-0/1115528025236920.xm\

l