Merck Top Scientist Plans Major Changes for Drug Research

Merck & Co. (MRK)’s new top scientist is planning major changes for the second-largest U.S. drugmaker, including cutting dead-end research projects and focusing its laboratories on biotechnology and cancer medicines.

Roger Perlmutter, Merck’s research and development chief, outlined his plans at a dinner with analysts yesterday at the Capital Grille steakhouse in downtown Manhattan. He replaced the company’s previous research chief, Peter Kim, in April.

Perlmutter “told the R&D organization that ‘this is going to be major surgery’ that ‘will take time to recover,’ but bring forth a stronger organization,” Seamus Fernandez, an analyst with Leerink Swann & Co. who was at the dinner, said in a note to clients. “We believe a major restructuring announcement within R&D (and likely the broader organization) is inevitable.”

Merck had been too cautious and slow, and failed to focus on new opportunities while rivals moved into biotechnology drugs and away from primary care medicines, Perlmutter said, according to the analysts. An R&D overhaul would come as Whitehouse Station, New Jersey-based Merck is preparing for new competition to its top product, the diabetes pill Januvia, which sold $4.09 billion last year.

A major problem at Merck Research Labs, as the company calls its R&D division, is too much red tape and not enough risk-taking, Perlmutter said, according to three analysts present at the dinner.

Cutting Layers

“One of the things he noticed upon arriving at Merck was how overly process-oriented it was,” Tim Anderson, an analyst with Sanford C. Bernstein & Co., said today in a note to clients. “He has been working hard to eliminate some of these unnecessary administrative layers.”

Perlmutter, formerly the top scientist at Amgen Inc. (AMGN), the world’s biggest biotechnology company by sales, began in June to streamline Merck’s research-and-development structure, including the elimination of a level of senior managers, Steve Cragle, a Merck spokesman, said today in an e-mail today.

There were too many “science projects” where experimental drugs that weren’t breakthroughs should have been canceled instead of being allowed to go ahead, Perlmutter told the group yesterday, according to Fernandez. Merck’s shares rose less than 1 percent to $48.01 at 1:37 p.m. New York time. The stock had gained 8.4 percent in the 12 months through yesterday.

New primary care drugs developed before Perlmutter took over either haven’t been approved, or are likely to face limited sales. Suvorexant, a sleep pill, in July wasn’t approved by U.S. regulators at the two highest doses, and faces competition from existing, widely used generic medicines. Odanacatib, an experimental osteoporosis treatment, has been delayed while the company conducts a second study.

Efficacy Emphasis

Perlmutter wants the R&D group to ask whether a drug works well first, and next whether it’s safe enough to go ahead with development. Before, there was too much emphasis on safety and not enough on breakthrough science, he told the analysts.

“He would rather see efficacy as the main objective and thinks that going down the safety route leads to too much risk-aversion,” Anderson said Perlmutter told the group.

Part of that risk-aversion may be a holdover from the drug Vioxx, a painkiller Merck pulled from the market in 2004 after a study showed it doubled the risk of heart attacks and strokes. After consumers sued Merck, the company in 2007 set up a $4.85 billion settlement fund to make payments. The company also had to pay $950 million to resolve civil claims and criminal charges from the U.S. government for misbranding and make false claims about its safety.

Biotechnology, Cancer

Perlmutter plans to move Merck away from primary care medicines and put more emphasis on biotechnology drugs and cancer therapies, Alex Arfaei, an analyst with BMO Capital Markets Corp. who was at the dinner, said today in a note to clients. “R&D will be more focused in terms of therapeutic areas and products that the company will invest in.”

Merck is also looking to acquire experimental cancer treatments, Perlmutter told the group, though it hadn’t seen a large number of likely targets, Arfaei said.

The company has fewer on-market and experimental biotechnology drugs than almost any other major pharmaceutical company, said Anderson, who also attended the dinner. “It’s exposure to biologics is too low.”

Perlmutter also will look to speed up experimental products in vaccines and viral treatments, including the liver infection hepatitis C and HIV, the analysts said.

To contact the reporter on this story: Drew Armstrong in New York at darmstrong17@bloomberg.net;

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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