2000 Excellence Awards: Judy C. Lewent

Merck grows from the inside out, powered by the CFO's joint ventures.
Russ BanhamOctober 1, 2000

When it comes to helping build revenues, the CFO’s job is challenged by the growth strategy that the CEO establishes. At Merck & Co., that means focusing far more on internal growth than most of its pharmaceuticals competitors do, as well as undertaking joint ventures rather than acquisitions.

But bucking the industry trend has become something of a specialty for Judy C. Lewent, Merck’s 51- year-old senior vice president and CFO. Indeed, she’s entering her third decade playing a pivotal role in both designing and negotiating the ventures, going back to a landmark 1982 agreement with Astra AB–the Swedish company now called AstraZeneca–in which Merck took on the marketing of such Astra pharmaceuticals as the anti-ulcer drug Prilosec. That 1982 pact evolved into a joint venture that by 1997 boasted revenues of $2.3 billion along with strong returns to both parties. More recently, Lewent’s revenue- building contributions have extended to sophisticated revenue hedging and research planning models that have positioned the company for even stronger top-line growth.

“From my standpoint, Merck is one of the best-managed [pharmaceutical] companies, and Judy is a key reason why,” says Cynthia Beach, vice president of global investment research at New York­based investment bank Goldman Sachs & Co. “She has tremendous leeway and autonomy to create deals, especially joint ventures. And the way she structures them is so imaginative and sophisticated, so perplexingly unique really, yet they always seem to turn out to be extremely beneficial financially.”

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“Frankly, it’s hard to say enough about how significant Judy is to Merck,” adds Barbara Ryan, managing director and pharmaceutical analyst at Deutsche Banc Alex. Brown, another New York investment bank. “Her job goes far beyond what we would view as a typical CFO’s.”

Organic and Internal

To a degree, Lewent’s triumph as the recipient of a 2000 CFO Excellence Award in the Revenue Growth category reflects the deeply strategic leadership she exerts at Merck, the Whitehouse Station, New Jersey­based global pharmaceutical company that had $32.7 billion in revenue last year.

“Many CFOs take as their prime directive the timely, accurate delivery of detailed financial data and analysis to top management,” says Raymond V. Gilmartin, Merck’s chairman, CEO, and president. “While the importance of these services cannot be overestimated, with Judy they are simply one of the many ways she contributes to the business.” Further, Lewent and her 750-person organization “make decisions about which developmental-product projects to fund and how to structure our product franchises, acquisition possibilities, and licensing arrangements.”

“Our overriding financial goal here is to be a top- tier growth company among our peers,” says Lewent. “Not only do investors demand such growth, but we need it to make crucial reinvestments into the business, such as our R&D budget, expected to hit $2.4 billion this year. While other pharmaceutical companies, such as Pfizer, Glaxo Wellcome, and Zeneca, face the same challenge, they’ve elected to grow their revenues through mergers and acquisitions. We’ve got a very different strategy.”

The partnership approach Merck prefers for moving into new scientific areas, or for complementing its existing positions, has taken the company over the years into various arrangements with the likes of DuPont, Johnson & Johnson, and Aventis SA. That approach, which allows organic growth through more investment in internal activities, has compared favorably with the “megadeal,” says Lewent.

With the Astra arrangement, “I was asked to model the concept even before we had identified them as a potential partner,” she recalls. But she took the deal to a new stage two years ago, with equally startling success. It was then, despite the agreement’s commercial and competitive benefits to Astra, that Astra’s management asked for the freedom to control its own destiny in the U.S. market. In response, Lewent and her team began fashioning a strategy to extract Merck from the day-to-day aspects of the partnership, while retaining a comparable financial interest in Astra products sold by the venture.

After prolonged and intense negotiations, during which Lewent and the finance group performed thousands of financial simulations, a deal was struck in July 1998. It included decade-long access to revenues from Astra’s existing products and drug pipeline–two-decade access to revenues from Prilosec –but none of the expenses. The capper: a $1.7 billion payoff if Astra subsequently merged with another company.

When it did merge with British-based Zeneca, “to obtain the divorce, Astra really had to ante up,” says Beach of Goldman Sachs. “Merck was in the driver’s seat all along.”

Structured for Speed

What is Lewent’s prescription for a successful joint venture? One ingredient is a jointly led, CFO-based organizational structure. “What we do is establish two co-chairs for the venture–me and my counterpart at the partnering company,” Lewent explains. “Together, we form the executive committee, which deals directly with the venture’s CEO. In that way, we go from the strategic to the operational, keeping the partners aligned in terms of objectives.”

The structure increases the speed of decision making. “The challenge for a JV is to make such organizations as effective as a wholly owned subsidiary,” says Lewent, while overcoming the handicaps involved with getting three entities–each partner and the JV– to agree on anything. “The answer, as we see it, is the executive committee. As co-chairs of the committee, we have [been] delegated [with the] responsibility by the board of directors to make day-to-day decisions with the CEO, removing layers of bureaucracy.”

Analysts like what they have seen in Merck’s approach, compared with rivals’ acquisition strategies. “Many of the mergers the industry has done have resulted in significant cost savings and substantial earnings growth over a short duration, but haven’t provided any evidence of adding value in the long run,” says Deutsche Banc’s Ryan. Buying up companies can add sheer bulk to operations, and “when you’re a bigger organization, the rock is tougher to push uphill,” she says. “Merck’s partnering strategy has been more successful in generating revenue growth.”

Not all of Merck’s joint ventures have fared well throughout. For example, two years ago, Lewent’s banking team ended a joint venture with DuPont Pharmaceuticals. Although the venture was making money, differing operational philosophies began to emerge, Gilmartin says. Lewent’s financial analyses also revealed that Merck’s resources could be better used in-house. Still, when Lewent pulled the plug, Merck walked away with a $2.6 billion payment for its share of the venture.

Fueling Independence

Lewent has also developed keen technical skills in revenue hedging and research planning. Her hedging model is praised for integrating economics, finance, statistics, and computer science to produce quantitative analyses of Merck’s business. That helps insulate operations from foreign-exchange volatility–and subjects Merck to envy in the industry.

In research planning, Lewent “was the first to do Monte Carlo simulations on product pipeline risks, assessing the risk- return ratios of drug projects at various stages of their evolution,” says Beach, who recalls from her own days at Pfizer how that company viewed Merck. “I can’t tell you how many times people would run around the halls saying,
‘Merck did this or that; now what will we do?’”

“Merck’s planning cycles are much longer than [those of] the rest of the industry, and Judy is central to that,” says Deutsche Banc’s Ryan. “At Merck, and particularly within finance, serendipity is a bad word.”

Says CEO Gilmartin, “Judy has forged a role for finance here that reaches way beyond the traditional, and it is in that expanded role that she has become one of the more influential voices, building our revenues and profit without the need to merge.

“In many ways,” he suggests, “her independence helps fuel our independence.”