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Merck's Cure: No Tonic on the Street

Wall Street appears to be unimpressed with Richard Clark's first move as Merck's new chief executive officer. On Nov. 28, Clark announced the first phase of what he's calling a "global restructuring," involving the elimination of 7,000 jobs, or 11% of the Whitehouse Station (N.J.)-based company's workforce. The overhaul will save up to $4 billion between 2006 and 2010. But Merck's stock (MRK) fell more than 4% on the news, to close Nov. 28 at just under $30.

The lack of enthusiasm for Clark's remedy isn't hard to understand. For one thing, the $4 billion in savings spread over five years did little to sway analysts. After all, next year Merck loses U.S. patent protection on its cholesterol-lowering drug Zocor, which alone generates more than $4 billion in annual sales. And other blockbusters will also see generic competition in the years that follow.

BROADER NEEDS. "It strikes me as a modest figure," says SG Cowen analyst Stephen Scala of the targeted cost reductions. "They better find more." Scala says Merck's earnings will likely decline every year through 2008, despite the cost cutting.

At the same time, Clark's plan left many key issues unanswered. Clark ran Merck's manufacturing operations before getting the top job. So it was hardly a stretch for him to come up with a plan to improve the efficiency of the manufacturing side of the business.

What remains unclear is whether he has the strategic vision to turn Merck around. That will involve rethinking how the company develops and markets drugs. The new restructuring plan gave few details on how Clark will tackle those R&D and marketing problems.

CRIMPED PIPELINE. The truth is, improving Merck's manufacturing efficiency will be the easy part. There are great risks if Clark takes a knife to Merck's 7,700-person sales force. Most Big Pharma rivals have yet to slash their sales forces, so Merck could put itself at a competitive disadvantage. At the same time, it will need major marketing muscle when it launches a new vaccine for cervical cancer next year.

As for fixing a lackluster R&D operation, rivals such as Pfizer (PFE), Johnson & Johnson (JNJ), and Bristol-Myers Squibb (BMY) have all been struggling with weak new product pipelines. And while Merck has been out striking licensing deals with other companies to strengthen their pipe, those deals are highly competitive, expensive, and risky.

Case in point: Merck paid over $200 million to Bristol-Myers Squibb as part of a deal to co-develop a new diabetes drug, Pargluva. But after safety concerns were raised last month, the drug appears all but dead. Now Merck and Bristol have begun talks to unwind the deal.

ONGOING TREATMENT. Add to that the distraction and potential financial drain of the Vioxx debacle (see BW Online, 11/3/05, "A Weak Tonic for Merck") and most investors are taking a skeptical attitude toward Merck's prospects (see BW, 12/5/05, "Presto: A New Vioxx Liability Estimate!")

"This company has been bleeding for years, and [management] is just now taking the first steps," complains Jon Fisher, health-care analyst at Fifth Third Asset Management. Merck's Clark still has to show he has the right prescription for what ails Merck.


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