Merck's Plan for Relief

After a mistrial in the first federal Vioxx case, the drugmaker turns its attention to cutting costs. Will it be enough to please investors?

By Amy Barrett

For Merck (MRK ), it's one win, one loss, and one draw so far on the legal front. On Dec. 12, a mistrial was declared in the company's first federal case involving its withdrawn painkiller Vioxx. Merck's general counsel, Kenneth Frazier, tried to portray the mistrial as a victory, arguing, "The plaintiffs were not able to carry their burden in this case." But Merck shareholders saw it differently.

After losing the first and winning the second trial, the company was widely expected to win this case, which focused on the death of Richard Irvin, a man who had taken Vioxx for less than one month. A key Merck study has linked Vioxx to cardiovascular problems only after use of 18 months or more. Merck stock was down 2.5%, to $28.41, on the news.


  The Irvin case ups the ante for Merck Chief Executive Richard Clark when he goes in front of analysts and reporters on Dec. 15. Clark, who has been with Merck since 1972 and took over as CEO in May, will be hosting his first analyst meeting at Merck's Whitehouse Station (N.J.) headquarters. And while Wall Street continues to have lots of questions about the Vioxx legal strategy (see BW, 12/5/05, "Presto: A New Vioxx Liability Estimate!"), there is just as much interest in how Clark plans to cut costs and revive the ailing drugmaker.

Among the key issues: Does Clark have plans to slash expenses beyond the $4 billion cost-cutting program he recently unveiled? Clark, 59, announced on Nov. 28 the first phase of a global restructuring that will slash 7,000 jobs -- 11% of the drugmaker's workforce -- and five factories. The overhaul is slated to save $4 billion through 2010. But Merck's stock fell 4.6%, to $29.56, on that news -- capping a 66% fall over the past five years.

Investors want more. "I want to see [Clark] lay out a hard-core cost-cutting strategy," says Jon Fisher, a portfolio manager at Fifth Third Asset Management. And nobody is picking on Clark. Such radical moves are needed throughout the industry, Fisher adds. "These companies are fat, happy, and lazy, and they're wasting money."


  A new harsh reality is hitting home at a number of companies. On the same day the Merck case ended in a mistrial, Bristol-Myers Squibb (BMY ) announced a new round of cuts at its analyst meeting. It's aiming for a minimum of $500 million in cost savings in 2007 and another $100 million in 2008.

Also on Dec. 12, Pfizer (PFE ) announced it was hiking its dividend. The move comes after mounting pressure from investors who have been disappointed in the return from Pfizer's internal investments in research and development. Those shareholders have, in effect, been telling management that internal investment returns have been subpar. They want more capital to be passed back directly to the stockholders.

"This is a mature industry with limited opportunity," says Alan Sebulsky, managing partner at health-care hedge fund Apothecary Capital. "It is a critical mindset change [pharmaceutical leaders] need to go through."


  So what do investors want to hear from Merck's Clark? For one thing, they want specifics on his plans for saving money, both in the marketing operation and in the once-vaunted R&D division. When Clark announced the recent cost-cutting plan, most of the detail was on how Merck would save money in manufacturing (see BW Online, 11/28/05, "Merck's Cure: No Tonic on the Street").

In addition, Merck's pipeline is still dangerously thin -- and a number of blockbuster products, including the cholesterol-lowering drug Zocor, will see generic competition in the coming years. That, however, defies an easy fix. Still, analysts are eager to hear about new licensing opportunities, as well as the progress of some products in development (see BW Online, 12/6/05, "Pharma Pipeline Picks"). The drugmaker hasn't completed enough licensing deals to strengthen its product lineup, says Lenny Shimunov, vice-president and portfolio manager at Dreman Value Management, a Merck investor.

Looks like Merck's Vioxx litigation strategy will be just one of many thorny issues facing Clark come Dec. 15.

Barrett is a correspondent for BusinessWeek in Philadelphia

Edited by Beth Belton

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