Since joining Merck in 1980, Judy C. Lewent has made a career out of measuring risk and reward through scientific models while incorporating strategic financial principles into the challenging environment of a pharmaceutical company. When she assumed the position of chief financial officer at Merck in 1990, she became one of the most powerful women in corporate America and the first woman to serve as the CFO of a major corporation.
But it was just two years ago, in the fall of 2004, that she faced perhaps one of the most unsettling experiences of her long tenure at Merck. That was when she was told “there were people running around the halls of Merck, afraid that we were not going to be able to make payroll,” Lewent said during a recent Wharton Leadership Lecture. On September 30 of that year, Merck had announced the voluntary recall of Vioxx, its top-selling arthritis and pain medication that new studies had linked to an increased risk for heart attack and stroke after usage of 18 months or more. Immediately after the recall of Vioxx, which recorded worldwide sales of $2.5 billion in 2003, Merck’s stock plummeted, from $44.46 per share on September 27, to $26.21 on November 5. The company faced an avalanche of litigation and an unprecedented public relations challenge.
But one thing the employees didn’t have to worry about, Lewent reassured them, was the financial well-being of the company and its ability to make payroll. “Not everyone at Merck went to Wharton,” Lewent said, smiling, as she recalled how she quickly communicated to Merck’s employees the strength of the company’s balance sheets, the value of products in the Merck pipeline, and the capital investment policies that would help it sustain the financial loss of an important product and subsequent legal costs. “In the fourth quarter of 2004, we had a call with analysts. I won’t say the most important, but one of the most important questions asked was, ‘Is the dividend secure?’ And I could [answer with] an unequivocal ‘yes.'”
Now, more than two years after Merck voluntarily took Vioxx off the market, its stock price has rebounded to approximately $46. “In the first six months of 2006,” said Lewent, “we beat our earnings estimates.” Equally important is the fact that she has returned to “talking about the future. We finally got to do that, starting in 2005 and continuing into 2006. We have a great business model, and that’s really exciting. I agonized in 2004, because what I really wanted to talk about even then was the future, the fact that we had the wherewithal to grow the business the way we wanted to, regardless.”
A Passion for Finance
According to Lewent, who is also executive vice president of Merck, four key words describe not only how she got through the tumultuous year of 2004 but how she has climbed to the top of corporate America. Today she is seen by many not just as a proven CFO, but as an innovative leader who helped drive external growth at Merck through creative joint ventures, and who led Merck’s Asia division to create business markets while addressing worldwide concerns over the HIV/AIDS pandemic.
“Passion, courage, resilience and vision,” said Lewent. “They actually almost occurred to me chronologically.” Passion not only came first but relatively easily. “I was very fortunate to discover that I just absolutely loved the world of finance,” said Lewent, who worked as an analyst with financial institutions before joining Pfizer in 1976. She served as Pfizer’s controller from 1977 to 1980, the year she joined Merck. “And I brought that passion with me from the very beginning.”
Lewent is the first to admit that her passion for finance came with a twist: She is well known for her ability to combine financial theory and risk management with scientific theories from physics — principles she first encountered and developed after graduating with an economics degree from Goucher College and a masters of science in business from the Sloan School of Business at MIT.
For example, through insights gleaned from business, science, math and finance, Lewent began to appreciate why the risks and rewards in the pharmaceutical industry were not always valued accurately by traditional financial measures. In published reports and interviews, Lewent frequently notes that only one in 10,000 explored chemicals becomes a prescription drug, and the process often takes a decade or longer to complete. In this scenario, traditional financial valuations fall short because they fail to take into account the long-term nature of pharmaceutical risks and the possibility of ultimate rewards.
To compensate, Lewent turned to a sophisticated, mathematical form of analysis called “Monte Carlo” that predicts results based on changes in several variables at the same time. With Monte Carlo analysis as her foundation, Lewent in 1983 developed a research planning model for Merck that takes into account all its risks and long-term development timetables and shows how they play out across the company’s portfolio of research projects.
The model can project 20 years out — a critical element in the long-term range for pharmaceutical development — providing valuable financial information about asset allocations that benefit the company at various development junctures and predict where investments with marginal returns can be eliminated. By combining knowledge of the pharmaceutical business with sophisticated financial tools like the Monte Carlo analysis, the research planning model gives Merck a long-term view of risk.
In 1983, when Lewent’s job was to evaluate capital expenditures and joint ventures, she presented her ideas on Monte Carlo simulation as a way to evaluate the projects. Her boss at the time suggested that because “‘no one was going to be able to understand that … We aren’t going to share it.’ What I realized as I got older is that he didn’t understand it,” Lewent noted.
When she moved into the research labs in 1985 as executive director of financial evaluation and analysis, she put into practice her belief that the two disciplines of science and finance “are intimately linked.” Since then, the research planning model has “become imbedded at Merck and has been run every single year,” she said. “That’s an example of passion — the desire early on to understand a way that finance will resolve a problem, and not be afraid of the people who are unfamiliar with what I am bringing to the table.”
Next, her reliance on what she called “courage” came when Lewent had an idea to create joint ventures for Merck with its leading competitors, including DuPont, Astra Zeneca (initially known as Astra) and Johnson & Johnson. The concept, said Lewent, was referred to as “a second pharmaceutical company, a way to enhance our pipeline by partnering with companies in a comprehensive way that did not duplicate efforts.” Lewent was discouraged from pursuing the concept by a superior who asked, “Why are you wasting your time? I don’t get this.” But Lewent was convinced that the idea made “strategic and financial sense.”
Twenty years later, one of the joint ventures she proposed is considered one of the “most successful licensing deals in any industry, ever,” she said. “You need to recognize when you really believe in something that is right. And sometimes, that takes courage. Just remember that nothing is linear, nothing is perfect, and start with the best possible structure.”
Expect the Unexpected
Lewent’s next word? Resilience. “If you asked me to speak five years ago, I might not have put that in the top three or four,” she said. “But today, it is right up there. For any of you who have followed Merck at all over the last several years, you [know] that we have been through an extremely trying time. And what I can leave with you is that many of you will have a lot of successes, for a long time. But at the end of the day, you should expect the unexpected. You will not always have successes and the only way to deal with this is resilience.
“And that leads me to vision,” she continued. “At this point, we have come through the difficulties and we are on our way to becoming the Merck that was at the top of the charts in the 1990s. Vision was critical to the leadership. An organization needs to hear that and believe in that vision as well. What was certainly felt in the last couple of years is that people stayed at Merck because they believed passionately in our vision and in what Merck had done on a human-benefit level. They were uneasy on a personal level, because we were at a point in time when the question was, ‘What does this mean for me? Why am I staying here? What are the opportunities?’ Quite frankly, everyone wants to be a part of a winning organization, an exciting organization.”
In response to questions, Lewent said that it is not difficult to balance the rights of the shareholders with the need to make sure that the drugs made by Merck benefit even those who can’t afford them. Long an advocate of what she calls “pricing for access,” Lewent believes that selling drugs for different prices in different parts of the world makes economic sense.
“The costs of discovering a particular drug are huge, the risk is high, the probability of success is low,” she noted. “With that front-end risk profile, at the back-end you want to be responsible. One of the things that I have actually spoken about is pricing for access — which is a nice way of characterizing different price ranges. This is an economically rational thing for your shareholders. Economics is on your side. If you are going to charge one price around the world, that (practice) will ensure that a lot of people won’t get the benefit of that product. In our case, this is a serious issue. We are here to get the products to the patients. Within that, you have to have a fair price that reflects the economics of the particular society.”
She acknowledged that being a CFO for a pharmaceutical company brings different challenges than being a CFO for, say, Dell Computer or Motorola. “The first, obvious difference is that we are dealing with different cycle times” for products, she said. “To turn work around each 10 to 15 years to discover a drug and get it to market is a different cycle time than Dell or Motorola has when they bring a computer [or a cell phone] to market. To be able to respond to the growth objectives requires different disciplines than shorter cycle time businesses.” The second difference, she said, “is that pharma is a very highly regulated industry, and not just in terms of getting our product approved.” Everything related to producing pharmaceuticals — from manufacturing facilities to advertising and marketing — is “very, very regulated.”
Lewent, who served as president of Merck’s Human Health Asia division from 2003 to 2005, reported that its partnership with China for HIV/AIDS prevention, treatment and care mirrored the success generated by the company’s earlier collaborations in Botswana, Romania and other countries severely affected by the HIV/AIDS pandemic. The program in China, which started in the fall of 2005, provides education, counseling, testing and health services, including treatment and care for people living with HIV/AIDS. The Merck Company Foundation has committed $30 million to support the partnership with the Chinese government for five years.
From the beginning, one of the issues surrounding Merck’s work in China was dealing with a partner/country that initially did not recognize the extent of the AIDS problem. Said Lewent: “The government was pretty notorious for denying, for years, that it had an issue. Then SARS arrived, and the World Health Organization told China it had to ‘get a handle on your health care infrastructure and your problems.'” By the time Merck stepped forward as a partner in June 2004, China had a new minister of health in place — “again, timing is everything” — who wanted to accept the problem and work collaboratively on HIV/AIDS treatment. “We acknowledged in our discussions in China that we are not here to give you our low price drug deal, but to give you our expertise. This is what the Chinese government really wanted. We brought our knowledge, our funding and people with experience to partner with the government.”
In 2005, when former CEO and chairman Raymond V. Gilmartin retired from Merck, Lewent was considered a strong candidate to be the next CEO. The position ultimately went to Richard T. Clark, another long-time Merck employee and former CEO of Merck’s Medco Health Solutions. “I was being considered. I wanted the job,” said Lewent when asked about the CEO succession. “Driving Merck’s success was something that I wanted to do. And originally, I thought it would be great to do it as [the CEO]. But today, I am very happy where I am, being part of a great team and bringing Merck back.”