New chief executive officers at Merck & Co. and Pfizer Inc., torn between profit demands of investors and the long-term funding needs of drug innovation, have chosen opposing strategies for future investment in research.
Pfizer CEO Ian Read said this week he will cut the drugmaker’s research budget by a third to $6.5 billion to $7 billion over two years. Merck CEO Kenneth Frazier today projected spending this year of $8.1 billion to $8.5 billion and withdrew the company’s long-term profit forecast to prop up research.
Merck and Pfizer both face generic competition over the next two years to products with billions in annual sales. Investors responded on Feb. 1 to Pfizer’s plan by driving up the stock the most in six months, while U.K. Prime Minister David Cameron yesterday called the cuts “depressing.” Merck shares fell as much as 3.9 percent today.
“I am not blind to what investors want us to do,” Merck’s Frazier said during a conference call with analysts and investors today. “They want us to invest in prudent ways, in ways that actually drive return on investment and productivity. But as a company we believe that the only sustainable strategy in the health-care environment that we’re in is real innovation that makes a difference to patients and payers.”
Pfizer, based in New York, and Merck, of Whitehouse Station, New Jersey, are eliminating thousands of jobs and closing plants to reduce costs after acquisitions completed in 2009. That’s when Pfizer bought Wyeth for $68 billion and Merck acquired Schering-Plough Corp. for $49 billion.
Merck, with $46 billion in sales last year, is spending a higher proportion of its revenue on research than Pfizer, which generated $67.8 billion in 2010.
“Merck is offering investors a fundamentally different approach than Pfizer, asking investors to pay for a substantially higher R&D budget,” said Marc Goodman, an analyst with UBS Securities LLC, in a note to clients. “The removal of the 2013 targets is a key negative for large-cap investors and we would expect the stock to be off a few percentage points reflecting more uncertainty.”
Merck fell 92 cents, or 2.7 percent, to $32.90 at 4 p.m. in New York Stock Exchange composite trading. The stock has lost 15 percent in the past 12 months. Pfizer rose 21 cents, or 1.1 percent, to $19.17. The stock rose 5.5 percent on Feb. 1, after the company reported its research plans.
“We have to fix our innovative core, and that’s what this R&D change is about,” Pfizer’s Read told reporters at company headquarters on Feb. 1. The reductions are part of a plan to overhaul the company’s research operation to focus on the most- profitable programs, he said.
“At some point your shareholders and stakeholders demand you have a return on investment in research,” Read said. “We’re looking at areas where we think it’s not a competitive advantage.”
Pfizer’s cholesterol pill Lipitor, the world’s best-selling drug with $11.4 billion in sales in 2009, began to lose patent protection against generic copies last year. Merck lost exclusivity for blood-thinners Cozaar and Hyzaar, with $3.56 billion in sales.
Merck didn’t give any earnings projection beyond 2011. The company previously anticipated high single-digit profit growth through 2013.
Pfizer plans to spend $8 billion to $8.5 billion this year and reduced its 2012 research target range by $1.5 billion.
Read also said Pfizer will increasingly outsource business. The company will close its research hub in the U.K. seacoast town of Sandwich, England, where Pfizer developed five of its 20 top drugs, including Viagra, before the purchase of Wyeth. Pfizer will also shift resources to its facilities in Cambridge, Massachusetts, from Groton, Connecticut.
“It is bad news,” U.K. Prime Minister Cameron told lawmakers during his weekly question-and-answer session in Parliament in London yesterday. “I’ve spoken to them again this morning. The company has decided to exit some areas of endeavor altogether, like allergies and some diseases.”
Merck today also took a $1.7 billion charge to write down an experimental blood thinner called vorapaxar. Earlier this month, a study of the drug, the most-promising compound from the Schering-Plough purchase, was halted after patients suffered strokes. The charge contributed to a fourth-quarter loss of $531 million, or 17 cents a share.
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