Merck Prepares for CEO’s Departure With Internal Successor Hunt

(Bloomberg) -- Merck & Co. has begun to prepare for the departure of Chief Executive Officer Kenneth Frazier and is focusing its search for an eventual successor on a pool of internal candidates, according to people familiar with the matter.

The drugmaker said in September that Frazier would remain CEO beyond 2019, rolling back a policy that would have required him to retire when he turns 65 in December. Frazier has presided over a period of strong growth at the drugmaker that has been built largely on the success of the blockbuster cancer therapy Keytruda.

Merck’s board opted to abandon the mandatory retirement age for Frazier because it believed the policy had outlived its relevance, and directors wanted more flexibility in the succession process, said a person familiar with the company’s planning.

But now, Merck is laying the groundwork for his exit, as well as that of its seasoned research and development leader Roger Perlmutter, who is 66. At the same time, sales of Keytruda are beginning to mature, leading some investors to ask where the drug giant’s future growth will come from.

On Thursday, Merck will hold its first major investor event in five years, where it plans to highlight several of its less visible senior executives. Some of Frazier’s top deputies are potential candidates to take his seat, according to a person familiar with the matter.

Among the Merck executives who could succeed Frazier are Chief Marketing Officer Michael Nally, Chief Financial Officer Robert Davis and Chief Commercial Officer Frank Clyburn, a person familiar with the process said. The board, of which Frazier is chairman, is also evaluating external candidates, though the preference is to pick a successor from inside the company.

A spokeswoman for Merck declined to discuss potential candidates.

Key Drug

Frazier, a lawyer who took Merck’s helm in 2011, is respected from Washington to Wall Street for building Keytruda into a franchise that can be used to fight a range of tumors, navigating challenging political currents, and delivering strong returns for shareholders.

The stock has performed especially well over the past 12 months, advancing 38% as Keytruda gained 11 more approvals from the U.S. Food and Drug Administration to fight different varieties of cancer. Over the same span, the S&P 500 index climbed 5.6%.

“They’ll have a tough time replacing him,” said Charles Elson, who leads the University of Delaware’s Weinberg Center for Corporate Governance. “This is a heavily regulated industry with a lot of legal challenges, but CEOs also need to be creative in their thinking. Frazier seems to have bridged that gap.”

Frazier is determined to put in place before his departure strong scientific leaders who can develop promising new drugs, said a source familiar with his thinking. In recent months, Merck has been buying smaller companies to bulk up its pipeline, including the cancer-drug makers Tilos Therapeutics Inc. and Peloton Therapeutics Inc.

Legal Roots

Frazier started at Merck in 1992, when he joined as general counsel for one of the company’s joint ventures after a stint at law firm Drinker Biddle & Reath. The Harvard Law School graduate defended Merck from claims that its blockbuster painkiller Vioxx caused heart attacks and strokes, culminating in a $4.85 billion settlement in 2007.

He was soon promoted to president of the company’s sales and marketing division, and scaled the ranks until he was named chief executive in 2011. Frazier is credited with replenishing Merck’s pipeline by bringing Keytruda, an innovative immunotherapy that has continued to gain approvals to treat new tumors, to market in 2014 for advanced melanoma.

Frazier has been adept at steering Merck through political controversy as well, striking a collaborative tone with lawmakers on trying to cap drug costs. One of about a half-dozen black CEOs at S&P 500 companies, he resigned from one of President Donald Trump’s business councils following comments Trump made about racially charged violence in Charlottesville, Virginia, in 2017.

“Frazier has had an unusual path,” said Credit Suisse analyst Vamil Divan in an interview. “When he became CEO, there was a lack of investor enthusiasm in the company’s R&D. He changed over the R&D leadership, investing aggressively and quickly.”

Keytruda has been a growth engine for Kenilworth, New Jersey-based Merck, bringing in $7.17 billion in sales in 2018. The drug reaped another $2.27 billion in the first quarter of this year, accounting for more than a fifth of the company’s revenue. But the treatment’s rapid growth is beginning to moderate as new competitors enter the market. Merck’s next chief will take the helm during a period of transition.

“There’s now a focus on the expansion beyond Keytruda,” Divan said. “We now need a little more from the internal pipeline.”

--With assistance from Cynthia Koons.

To contact the reporters on this story: Riley Griffin in New York at rgriffin42@bloomberg.net;Anders Melin in New York at amelin3@bloomberg.net

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Timothy Annett

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