[Ip-health] Wall Street Journal: Merck to Cut Staff by 20% as Big Pharma Trims R&D

Thiru Balasubramaniam thiru at keionline.org
Wed Oct 2 02:54:00 PDT 2013


October 1, 2013

Merck to Cut Staff by 20% as Big Pharma Trims R&D

   - JOSEPH WALKER <http://topics.wsj.com/person/A/biography/7751> and
   - PETER LOFTUS <http://topics.wsj.com/person/A/biography/7317>

Merck & Co. said it plans to slash its 81,000-strong workforce by 20% over
the next two years, a stark show of the diminishing
research-and-development capabilities of some of America's biggest health

The company also said it would close offices in New Jersey and discontinue
some late-stage drug development, all in the service of saving about $2.5
billion annually by 2015.

The cuts will dramatically reduce the size and scope of Merck, one of the
U.S. pharmaceutical industry's most enduring companies and the
second-largest by sales after
 Inc. PFE +0.57%<http://online.wsj.com/public/quotes/main.html?type=djn&symbol=PFE?mod=inlineTicker>
for introducing the first measles vaccine, Merck attracted scores of young
scientists and physicians in the 1980s and 1990s, who helped turn the
company into one of the market's most widely held and widely followed

But those days are long gone, as the company has struggled to maintain a
robust set of new products while juggling lower reimbursement rates,
generic competition and some research dead-ends. After acquiring
Schering-Plough Corp. for $41 billion in 2009, Merck's workforce nearly
doubled to reach a peak of 100,000. Assuming no new employees are added by
2015, the company's total head count would fall to 64,800 after the
layoffs, or just 17% more than before the merger.

Advancements in the understanding of genetics and biology have increasingly
fueled drug development in recent decades, and many of the most promising
new drugs have been aimed at niche disease populations, developed in the
labs of biotechnology competitors considered closer to the cutting edge of
science. Merck has begun to catch up, most recently with an experimental
cancer drug that harnesses the immune system to fight tumor cells. But some
former executives worry that the company wasn't quick enough to adapt and
that its declining size mirrors the shrinking ambitions of other large drug

"Merck and lot of the big companies wrongly tried to target blockbusters
for major, mega-conditions, and that strategy failed," said Eve Slater, a
former research and development executive who left Merck in 2002. Now,
"they make small acquisitions and have risk absorbed by the smaller
biotechs that are populated by their former scientists."

Merck Chief Executive Kenneth Frazier said in an interview Tuesday that the
changes should help it improve its return on investment, focusing on
diseases like cancer, Alzheimer's disease and the hepatitis C virus. Mr.
Frazier said that, despite the cuts, Merck was committed to research and
development and would continue to invest for the long term.

"You've got to make sure you establish an infrastructure that will allow
you to have R&D in good times and bad," Mr. Frazier said.

A sharper research focus could help Merck better compete with younger
biotechnology firms to develop genetically targeted medicines that treat
relatively small patient populations, but command prices topping $100,000
annually because of their greater effectiveness. So-called specialty drugs
typically have an easier time gaining regulatory approval and reimbursement
from insurers than drugs for common conditions like high cholesterol,
analysts said.

The new strategy carries risks because some of the disease areas Merck will
focus on, including Alzheimer's disease, have been resistant to big
clinical advances. In areas like hepatitis C, meanwhile, there are
companies like Gilead
 Inc. GILD -0.11%<http://online.wsj.com/public/quotes/main.html?type=djn&symbol=GILD?mod=inlineTicker>already
in the lead to bring their drugs to market first.

On Tuesday, the company said it would discontinue or out-license certain
drugs in late-stage development, and put greater emphasis on acquiring
experimental drugs from outside the company, which could help minimize
exposure to costly research flops. Such a strategy is a departure from the
days when large firms prided themselves on developing new drugs internally,
said Dr. Slater, the former Merck executive.

"They're sitting 30,000 feet in the clouds waiting for the biotechs to
develop the good targets," said Dr. Slater, now an associate clinical
professor of medicine at Columbia University. "Merck is trying to reorient
itself as a biotech [venture capitalist]."

Merck said it would continue its focus in areas like vaccines and diabetes,
where it already has sizable footprints with drugs like Januvia, which had
sales of $1.07 billion in the quarter ended June 30.

Merck has also had setbacks in its development of mass-market drugs,
including the cholesterol treatment Tredaptive, and its glaucoma drug
Saflutan has had disappointing sales. Like its peers, the company has been
hurt as major drugs, such as allergy and asthma drug Singulair, have lost
market exclusivity. Mr. Frazier saidMerck's
 MRK +2.38%<http://online.wsj.com/public/quotes/main.html?type=djn&symbol=MRK?mod=inlineTicker>
of recent years are a reminder of the inherent uncertainty of drug and
vaccine research.

"We have to survive these failures" in order to have the resources to
invest in promising opportunities such as Merck's immune-based cancer
therapy, MK-3475, he said.

A pared-down research-and-development team may be seen as a setback for Mr.
Frazier, who made a bet in 2011 to maintain Merck's hefty R&D budget, even
at the cost of backing off Merck's financial forecast at that time. By
contrast, Ian Read, who took the helm of rival Pfizer around the same time
as Mr. Frazier joined Merck in 2011, vowed to slash his company's spending
on drug research and development and buy back a big chunk of stock.

Merck's R&D spending fell slightly to $8.17 billion for 2012 from $8.47
billion in 2011, and comprised about 17% of sales.

Merck hinted that changes were in the offing earlier this year when it
hired as its new R&D chief Roger Perlmutter, a former senior executive at
Amgen <http://online.wsj.com/public/quotes/main.html?type=djn&symbol=AMGN>
 Inc.,AMGN +2.37%<http://online.wsj.com/public/quotes/main.html?type=djn&symbol=AMGN?mod=inlineTicker>
world's largest independent biotechnology company. In June, the company
said it would be cutting jobs and stripping a layer of senior management
from its research-and-development arm.

Merck said it would close a facility in Summit, N.J., which currently
houses 1,600 employees, according to a spokeswoman. The company intends to
relocate its headquarters from Whitehouse Station, N.J., to existing
facilities in Kenilworth, N.J., about 30 miles east.

The pharmaceutical company expects restructuring costs of between $2.5
billion and $3 billion related to the revamp, including $900 million to
$1.1 billion this year. Merck lowered its earnings-per-share guidance to a
range of $1.58 to $1.82, from a range of $1.84 to $2.05 previously; the
company maintained its projected earnings per share, excluding
restructuring items, at a range of $3.45 to $3.55.
—Tess Stynes contributed to this article.

*Write to *Joseph Walker at joseph.walker at wsj.com and Peter Loftus at
peter.loftus at dowjones.com

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