In the second of our series on consistent success, based on Professor James B. Hobbs’ book Corporate Staying Power, we examine the ongoing success of pharmaceutical giant Merck & Company.

Ike was president. Elvis was king. And Merck & Co. was starting a record for consistent profitability that would be virtually unsurpassed in modern business history.

From 1956 to the present, a period of 39 consecutive years, Merck has produced returns ranked in the top fifth of the Fortune 500, according to James B. Hobbs, a former professor of business administration at Lehigh University, who analyzed the profitability of the ranking’s members in his 1986 book Corporate Staying Power.

The record is all the more remarkable given that Hobbs had only set 10 years in the top 100 as his standard of staying power – based on returns on investment and sales – and only 14 companies had made his 1986 list. Merck was then in the twenty-ninth year of its record run. Since then, the world’s largest drug company has produced earnings increases at an average annual rate of 21 percent.

Such an achievement may seem beyond the reach of even the most successful companies, especially in an era of increasingly brutal pressure on the bottom line. Indeed, earnings growth has slipped at Merck in the last few years and it has never been more difficult for the company to maintain its growth record.

Competitors have grown bigger through acquisitions and have become better equipped to challenge Merck in the marketplace, while at the same time newer, more powerful customers, principally health maintenance organizations, better known as HMOs, have pressured drug companies for lower prices.

Yet, having the goal of sustaining long-term earnings growth is the first step toward achieving it, and Merck is a model for tough times. Even in this most challenging period earnings rose an enviable 13 percent last year and analysts see potential improvements over this year and next.

What keeps Merck on the growth track for so long are a number of factors. Among the most important for Hobbs is having a crystal-clear mission, visionary leadership, thorough long-term planning, a commitment to customers and a distinct culture.

These qualities are common to all the companies in Hobbs’ study, but the mission comes first, and perhaps no company has set a higher standard than Merck – not just for today or even during its 39-year run, but throughout the company’s 105-year history.

The Mission

“Medicine is for the people,” said George W. Merck, son of the company’s founder and the head of the company for more than 30 years. “It is not for the profits.” This was Merck’s creed, and it was so apart from the common corporate mentality that it was singled out on the cover of Time in 1952 beneath a portrait of Merck, who was profiled in the magazine. The words have not lost their power in the company. Developing new medicine that people need still comes first.

“The success of a company like Merck,” Raymond Gilmartin, its current chief executive, told the Bergen County Record just after moving to Merck from the chief executive spot at Becton Dickinson two years ago, “depends on its ability to innovate.” That attitude could lead almost anywhere, including places businesses are not known to go. In the 1980s, Merck developed Mectizan, which prevents a parasitic disease that has blinded millions. Though highly effective as a medicine, it was a loser as a profit maker because the people that needed it – natives of poor tropical nations – couldn’t afford to pay for it. All Merck could do was give it away. So they did.

Profits may also take a back seat to potentially more commercial drugs. Just this March, Merck came out with a new AIDS drug and, surprising many, it set the medicine’s price 30 percent below the cost of a similar drug approved for sale by a competitor only two weeks earlier. “Merck has done a very humane thing with the prices it’s charging,” said Jules Levin, who runs the National AIDS Treatment Advocacy Project in New York.

Not that profits are of no concern. The record obviously shows quite the contrary. “Orphan” drugs like Mectizan are the exception that prove the rule. Drugs with annual sales of more than $100 million are routine and billion-dollar blockbusters keep rolling out of Merck’s New Jersey home base and its plants around the world. In recent years, it has scored big with Vasotec, a $2 billion sales winner used in treating high blood pressure, and Zocor, another $2 billion winner, which is used to lower cholesterol.

Beyond the Time cover line, Merck said: “The profits follow, and if we have remembered that, they have never failed to appear.” Not quite, but the unwavering commitment to its mission has more than served Merck well.

Visionary Leadership

The origins of Merck’s success can be found in the vision of its founding family. The company traces its history back to the 1600s and the family firm of E. Merck, a German company with an excellent reputation in the speciality chemical business. After a crisis in which its labels were being illegally used by U.S. firms, George Merck was dispatched to New York to keep an eye on the company’s interests and start Merck & Co. as a subsidiary to the German parent company.

It was 1891 and in the 34 years of his command, the founder laid the groundwork for the modern Merck. He began manufacturing, expanded the product line, opened his own foreign subsidiary in Canada and finally broke away from the parent company.

Throughout his years on top, he continued to build on the company’s reputation for reliability and selling the highest quality chemicals, everything from iodine to morphine to baby powder, and when he turned over control of the company to his only son, George W. Merck, the company was one of the “big three” specialty chemical producers in the U.S. with sales of $6 million. The son took Merck several steps higher with a commitment to building a research organization and a series of acquisitions. In 1953, Merck completed his most important takeover: Sharp & Dohme, a drug company. The combination produced the modern Merck corporation, a fully integrated, multinational producer and distributor of pharmaceuticals, as well as specialty chemicals.

Merck’s successors built on the family’s visionary achievements. John Connor, the first non-family member to lead Merck and the company’s first chief executive, created a new decentralized structure and introduced management by objectives, as well as formal profit planning and long-term strategic planning.

Connor’s successors expanded research, went into new fields and led the development of the drugs that led to the astonishing growth Merck enjoyed for so long. Except for Gilmartin, all were promoted from within – another characteristic of leadership that Hobbs found common to his top-performing companies.

What led Merck to look outside itself? One point brought up again and again was Gilmartin’s own vision. While at Becton Dickinson, he recognized the growing importance of what was becoming the key customer for drug companies – the HMOs and the need to sell them the highest quality drugs at the best possible prices.

Long-Term Planning

Thinking ahead, planning ahead – way ahead – is fundamental to Merck’s business because, from research to sales, it takes an average of 12 years and $359 million to bring a drug to market. To reach its goals, Merck plans everything it does carefully and monitors every activity every step of the way.

The attention paid long-term planning, asserts Hobbs, is critical to Merck’s success. Without it, the company would flounder. Merck works with such attention to detail that the expected arrival of new drugs is marked along a time line that may extend 10 years into the future.

Merck shows the same care at the end of the process with sales as it does in the beginning with research. The experience of Huskel Ekaireb, known as Merck’s master salesman, provides one example.

He began cultivating contacts in the Japanese market when he joined the company’s international operations in 1949. Always the most difficult to penetrate, the Japanese market was to be a prize worth going after as the world’s second largest market after the U.S.

Ekaireb proceeded slowly, methodically, with a manner both sensitive and knowing – and with an understanding that customers may not always buy when salesmen want them to. He first negotiated the sale of Merck antibiotics to Japanese companies when the country was still under the command of the Allies. That led to an arrangement with Banyu, one of Japan’s leading drug manufacturers, to import cortisone.

Out of that relationship Ekaireb was able to begin a joint sales venture with Banyu. That was followed by agreements reached in the mid-’50s to distribute and manufacture Merck’s drugs in Japan. The relationship building continued, and 30 years later Merck bought majority control of Banyu – the first such takeover by a U.S. company of a first-tier corporation on the Tokyo stock exchange.

Merck’s success in Japan and elsewhere in Asia was a tribute to Ekaireb, who by the time of his retirement in 1982 had helped propel Merck’s overseas sales to more than $1 billion – 10 times what the entire company sold the year he joined Merck.

A Distinct Culture

It is then people that drive Merck, people like Leslie Krone-Speck, a manufacture area head, who enjoys finding ways to get her employees “excited about their jobs and working toward improving things.” It’s also about Theresa Williams, a senior research chemist at Merck (as is her husband, Peter), who “takes a lot of pride” in what she does. And it’s about Larry Clark, a salesman, who showed up at a doctor’s office the only time he would see him – one in the morning.

Together they and 47,000 other employees are the essence of the Merck culture: a strong sense of social responsibility, personal commitment, loyalty, the determination to produce and market high-quality products, teamwork, creativity, safety and environmental consciousness and a “can-do” attitude that comes from knowing they work for the leader in the drug industry or, as Business Week called Merck, “The Miracle Company.”

By putting together a company like this, P. Roy Vagelos, Gilmartin’s predecessor, told the Harvard Business Review at his retirement two years ago, the company becomes a “family” where management has lightest hands on the controls.

“You want these people to take off on their own,” he said, “and the faster they take off, the faster you should back off.”

For their initiative and loyalty, Merck employees are well rewarded. As Hobbs notes, Merck “seeks to offer its entire staff an outstanding compensation package that is the envy of the pharmaceutical industry.”

The Customer King

Producing profits from quality drugs does not just happen. Merck’s commitment to customers begins, as always, with research. “First, we must develop the safest and most effective drugs possible in the labs,” said Vagelos.

Under Vagelos in the 1970s when he was then Merck’s research chief, the company undertook first to learn how a specific disease works; then to design, develop and manipulate the structure of compounds to fight it, rather than use a shotgun approach of testing an almost infinite array of chemical compounds by trial and error in the hope that a possible treatment for a specific ailment might eventually emerge.

But Merck’s commitment doesn’t stop there. “Once the drug is on the market and has been prescribed to a patient,” Vagelos said, “we must be sure that the patient is taking the right drug, that he or she has the appropriate information to take the drug properly and that the drug will not interfere with other medications the patient is taking.”

That’s good medicine, but it’s also good business because knowing what the customer needs, how much and how often, means, said Vagelos, that Merck can use the “information to sell products, educate people and, ultimately, build” the Merck brand name.

And build it has. Despite being one of the oldest, most established and largest companies in the world, with sales last year of nearly $17 billion, Merck remains very much a growth company with staying power.