By Ransdell Pierson
Oct 1 Merck & Co, taking a cue from
rival drugmakers that have slashed research spending to bolster
earnings, said it will cut annual operating costs by $2.5
billion and eliminate 8,500 jobs, or more than 10 percent of its
Merck, whose shares rose 2.3 percent, said it aims to narrow
its focus to products with the best chance of winning regulatory
approval and achieving substantial sales.
It will jettison research products with less likelihood of
success. It plans to pull the plug on some drugs already in
late-stage trials, and will license some products to other
The job cuts would be in addition to expected remaining cuts
of 7,500 positions from a 2011 restructuring that involved
elimination of 13,000 positions - largely of administrative
personnel but also related to sale or closure of manufacturing
Merck, like Pfizer Inc, AstraZeneca Plc and
Sanofi in recent years, is reaching again for its axe
because of competition from generic medicines, stalled sales
growth of its important drugs and failures or delays for
high-profile experimental drugs.
But half the job cuts from Merck's new restructuring will
come from research and development, which has been a protected
sphere for the drugmaker, which has long been renowned for its
research prowess but has stumbled in recent years.
"We're not doing indiscriminate cuts in research and
development, we're doing surgery around where we should invest,"
Merck Chief Executive Kenneth Frazier said in an interview.
Frazier said the company is now evaluating which drugs or
disease areas to discard and which to keep, but few decisions
have yet been made.
"And by attacking our cost bases, we will free up resources
for mergers and acquisitions and business development," Frazier
said, noting the company's strong interest in buying new drugs
or licensing them from other drugmakers.
About 40 percent of the cost-cutting from the new
initiative, or $1 billion, will be realized by the end of 2014.
The cuts will come equally from marketing and administrative
areas and from research and development, Merck said. The rest of
the cuts will be completed by the end of 2015, it said.
SLOWER SALES GROWTH
One of the more worrisome challenges facing Merck is slowing
sales growth for its biggest franchise, the diabetes drugs
Januvia and Janumet which have combined annual sales of $6
billion. They have been Merck's growth engine over the past
three years but are stalling due to similar rival drugs and
newer classes of diabetes treatments.
And sales of Merck's former top seller, its asthma drug
Singulair, have plunged 80 percent due to generic competition,
and other Merck medicines will also face cheaper generics soon.
Singulair sales reached $6 billion a year at their peak.
Pfizer Inc became an industry trendsetter in
aggressive cost-cutting in early 2011 when it announced plans to
chop annual research spending by as much as $3 billion. It went
on to close numerous research sites and has halted or curtailed
spending for research on drugs for allergy, urology, internal
medicine and other therapeutic areas requiring large sales
Wall Street has cheered Pfizer's moves, especially since the
company has launched many new medicines since the changes,
including cancer drugs. Moreover, it has divested its animal
health and infant formula businesses, and plans to return much
of the proceeds to investors through share buybacks.
Merck dug in its heels after Pfizer's dramatic streamlining,
saying it planned to hold steady with its research spending in
order to advance its promising medicines through clinical
Alex Arfaei, an analyst with BMO Capital Markets, said the
cost-cutting will be helpful in the short term, especially next
year, when he expects Merck revenues to be flat due to increased
pressure on Januvia.
But he said he was concerned that Merck was putting too much
faith in a handful of experimental drugs, including a new type
of cancer drug called a PD-1 inhibitor that works by boosting
the immune system, a new type of treatment for Alzheimer's
disease called a BACE inhibitor, and improved versions of its
Gardasil vaccine to prevent cervical cancer and its treatment
for hepatitis C.
"Overall, today's announcement makes us more cautious about
the potential of Merck's pipeline" of experimental drugs, Arfaei
Merck in April replaced its long-time research chief, Peter
Kim, with Roger Perlmutter, a former Amgen Inc research
head who is expected to better acquaint Merck with biotech drugs
- injectable drugs made in living cells that have become
standard treatments for a wide array of diseases, including
cancer and rheumatoid arthritis.
Merck has focused mainly on development of conventional
drugs, or pills, although it is a also leader in vaccines.
The company had several triumphs under Kim, including
development of Januvia, its Gardasil vaccine to prevent cervical
cancer, its Zostavax shingles vaccine, and its Isentress
treatment for HIV.
But more recently, it has been hurt by failed trials of
cholesterol treatment Tredaptive and migraine drug telcagepant,
and a regulatory delay for a new type of osteoporosis medicine
Moreover, cost savings from Merck's 2009 purchase of rival
Schering Plough have mostly dried up and are no longer able to
boost company earnings.
Merck said it still expects full-year 2013 earnings of $3.45
to $3.55 per share, excluding special items. It earned $3.82 per
share last year.
It plans to take restructuring charges of $900 million to $1
billion this year, mostly in the third quarter.
The company on Tuesday also said it plans by 2015 to move
its global headquarters from Whitehouse Station, New Jersey, to
existing facilities in Kenilworth, New Jersey. It previously
planned to move its headquarters to Summit, New Jersey.
Merck said it decided it could achieve more cost savings by
closing its Summit site and its main Whitehouse Station
Merck shares have risen 17.3 percent this year, in line with
advances seen for the ARCA Pharmaceutical Index of large U.S.
and European drugmakers.