56 Business The EconomistFebruary 24th 2018
12 large retailers typically avoided because of
the complex logistics involved. The strat-
egy paid off. Magnit is Russia’s largest retail
network in terms of stores. The Boston
Consulting Group said that between 2009
and 2013 it created the most value of any
retail network globally.
Yet recent years have been rough for
Magnit. Russia’s recession in 2014-16 hit
consumers hard. Though the economy re-
turned to modest growth in 2017, Magnit’s
profits fell by over one-third. X5 Retail
Group, its main competitor, has overtaken
it in terms of revenue. Magnit’s share price
had been plunging, and the company will
not pay dividends this year. Mr Galitsky
says his vision began clashing with inves-
tors’ wishes. “If investors want changes,
they should get them,” he said.
Pending anti-monopoly approval, VTB
will pay 138bn roubles ($2.4bn), a 4% dis-
count at the time of purchase. Investors
took the news glumly; on the day of the an-
nouncement Magnit’s shares fell by 10% in
London, and nearly 8% in Moscow. Many
worry thatVTBlacks the expertise and at-
tention to manage Magnit’s complex retailbusiness effectively. Western sanctions on
VTBadd another set of risks. In addition,
by buying a stake of less than 30%, VTB
avoided a legal obligation to offer buyouts
to minority shareholders. “It’s a slap in the
face to all investors,” Aleksei Krivoshapko
of Prosperity Capital Management, a mi-
nority stakeholder, told Vedomosti, a Rus-
sian business daily.
ForVTB, Magnit offers an attractive equ-
ity-`investment opportunity. It aims to
spend several years rebuilding Magnit be-
fore reselling its stake. “We’re not going to
stay in the asset forever,” said Andrei Kos-
tin, the bank’s chief executive. VTBalso an-
nounced a partnership to merge Magnit’s
transport and logistics operations with the
Russian postal service.
The sale means the end of an era for Mr
Galitsky, though it may be for the good.
“When you’re under constant stress, some-
times you think a nightmare ending would
be better than a nightmare without end,”
he told a business school in 2016. He will
exit as chief executive and resign his board
seat, keeping only 3% of the firm. He will
give his new free time to youth football. 7W
HEN Ken Frazier, chief executive of
Merck, an American pharmaceutical
giant, started his job in 2011, he had a hard
decision to make. The firm had promising
new drugs—such as Januvia, for diabetes,
and Gardasil, a vaccine against cervical
cancer. But the pharma industry was strug-
gling with dismal returns on R&D and in-
vestors were questioning if companies
were overspending on science. Some sur-
rendered and started buying in drugs in-
stead. But Mr Frazier opted to carry on
backing his labs and promised publicly tospend on R&Dfor the long term, not for the
stockmarket’s immediate gratification.
An opportunity to implement the
pledge soon arrived. Merck’s merger with
another pharma firm, Schering-Plough, in
2009, had brought it an obscure new can-
cer drug. At first Merck’s scientists were un-
impressed and relegated the drug to a list
of assets to be licensed out. There was
widespread scepticism at the time about
whether drugs that attacked cancer using
the immune system would work.
Then the firm noticed that a rival, Bris-tol-Myers Squibb (BMS), was having suc-
cess in trials ofimmuno-oncology drugs,
and it fired the starting gun on the drug
MK-3475, as it was then known. Using an
innovative trial design, the firm pushed the
drug through testing as quickly as possible.
It won status as a breakthrough drug wor-
thy of speedier approval from the regulator
in 2013. By 2014 Keytruda (pembrolizu-
mab) had reached the market to treat ad-
vanced melanoma, beatingBMS’s rival
drug, Opdivo (nivolumab), by months. It
sold well, reaching $1bn in cumulative
sales by the second quarter of 2016.
The real commercial prize, however,
was lung cancer, from which the industry
makes a lot of money. Here Merck made
another crucial decision, which was to
use a “biomarker”, a way of choosing the
patients most likely physically to respond
well, which increases the likelihood of a
successful trial outcome. The downside of
the approach isthat, once approved, a drug
can only be given to patients who have
that marker—which will crimp sales.
That problem became clear as Merck
and BMSchased a series of approvals for
their drugs to be used in lung cancers—ini-
tially as a second treatment choice and
then as a primary treatment. The limita-
tion resulting from Keytruda’s need to test
for a biomarker helped Opdivo outsell it.
But a turnaround came when Keytruda
showed in mid-2016 that it was effective in
trials that used it as a first treatment on a
common type of lung cancer. Meanwhile,
Opdivo, not using a biomarker and tested
on a broader population of patients, failed
(the lack of a biomarker made it harder to
show that it improved survival rates).
In 2017 Keytruda’s sales almost tripled
and surpassed $3.8bn. In the most recent
quarter its sales nearly caught up with
those of Opdivo. Merck’s fortunes now
rely heavily on its wonder drug. Vamil Di-
van, an analyst at Credit Suisse, a bank,
predicts that Keytruda sales will be about
$10.7bn in 2030—not bad for a firm with an-
nual revenues of $40bn. But the caveat is
that this estimate lies in the middle of a
whopping $4bn range of possible out-
comes. The firm also does well in vaccines,
making $6.5bn last year, and has a robust
animal-health division. Yet sales of its cho-
lesterol drugs, Zetia and Vytorin, have
plunged thanks to competition from gener-
ics, while two lucrative diabetes medi-
cines Januvia and Janumet, are likely to be
threatened by newer medicines.
Keytruda has new competition. Firms
such as Roche and AstraZeneca are also
rushing to deliver their own versions of
immuno-oncology agents. Moreover
Merck’s keen focus on oncology, and on
one drug in particular, makes analysts
worry that the firm is not sufficiently diver-
sified. Yet it ispushing on regardless. Last
year it agreed to pay AstraZeneca, a British
pharma firm, up to $8.5bn to develop andThe pharma businessMaking Merck work
A pharmaceutical company bets big on a cancer drug