Merck to Fire 8,500 in Strategy Overhaul That Shifts R&D

Merck & Co., the second-biggest U.S. drugmaker by sales, will fire 8,500 workers and revamp its research and development after seeing new medicines delayed by U.S. regulators.

The positions eliminated add to 7,500 cuts already announced, the Whitehouse Station, New Jersey-based company said in a statement today. The total amounts to 20 percent of Merck’s 81,000 workers. The company declined to break down where the dismissals will occur, saying only they will come from all areas of Merck, including R&D, sales and management.

The moves, designed to save $1 billion next year, are part of a strategy set by Chief Executive Officer Ken Frazier and R&D chief Roger Perlmutter, who was hired in April to replace Peter Kim. Under Kim, experimental drugs in cardiovascular, surgery, and osteoporosis suffered setbacks while rival drugmakers were able to get new products to market.

“We will sharpen our focus on core therapeutic areas,” Frazier said on a conference call. That means more resources for vaccines, cancer, diabetes and hospital care. “In other therapeutic areas, we will significantly reduce our resources.”

The company also will trim its real estate holdings, particularly in New Jersey, and work to improve the efficiency of its manufacturing and supply network. As part of the move, its headquarters will move to Kenilworth, New Jersey, about 35 miles east and closer to New York City. The company previously had planned to move to Summit.

$2.5 Billion

By 2015, savings from the cuts will rise to $2.5 billion a year, the company said. Half of the savings will be in R&D, and half in the company’s commercial arm, which includes its sales force and marketing. The firings will leave Merck with about 65,000 workers.

Merck rose 2.4 percent to $48.74 at the close in New York. The stock has gained 7.8 percent in the last 12 months, compared with an 19 percent gain in the Standard & Poor’s 500 Pharmaceuticals Index of drugmakers.

The company will place more emphasis on developing drugs with the most sales potential, which means getting the business side to work more closely with researchers, Frazier said. “Our goal, and it’s Roger’s goal, is to completely align the thinking in R&D with the thinking inside what’s called commercial in the company,” he said in an interview.

Not Enough

The change was made with the realization that’s it’s no longer enough to just get a drug approved, the CEO said. In the past, “access was just available.” Now, “we want to begin with the end in mind.”

The company picked the four therapeutic areas based on what it could do best. “It was not simply a need of where unmet medical need is, it’s an analysis of where we’re positioned to lead,” Frazier said in the interview.

Merck will also put more focus on the world’s biggest economies, including China, Japan, Europe, the U.S. and Canada. That doesn’t mean the company will exit any markets, though. “You shouldn’t conclude that because we have picked our top 10 markets, the other markets aren’t important,” Frazier said. “It’s about prioritizing our spend to the greatest opportunities.”

“Clearly a more efficient operating structure will help Merck, particularly in 2014, when we expect revenues to remain essentially flat,” said Alex Arfaei, an analyst with BMO Capital Markets Corp., in a note.

Refocused R&D

The refocused R&D effort may not help the company as much as it hopes, Arfaei said in a note to clients. “Merck does not have a strong track record in oncology; therefore, there is some execution risk,” he said.

The company’s new focus is in very competitive areas, he said, and “we have some concerns about the longer-term growth prospects of the company.”

The Merck cuts follow moves at other major U.S. drugmakers to slim and refocus after years of expansion through large deals. Pfizer Inc., the biggest U.S. drugmaker, has shed non-drug units. AbbVie Inc., split off from Abbott Laboratories at the start of the year, has said it will no longer focus on primary care medicines and has fired workers as products in that category have lost sales exclusivity.

More Rivals

Merck’s biggest sales line, diabetes, is being threatened as half a dozen new competitors to its drug Januvia that are in the final stages of development or scheduled to debut in the next two years. Pfizer and Bristol-Myers Squibb Co., meanwhile, have already put emphasis on a new generation of cancer drugs that Merck now says it will focus on.

Diabetes will stay the company’s biggest emphasis, said Adam Schechter, president of human health at the company. It will also start up a separate business to help develop and promote its new cancer drugs, though, including an immune system-based therapy called MK-3475.

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 the lower dose isn’t available yet.

The medicine will also face competition from existing, widely used generic medicines. Odanacatib, an experimental osteoporosis treatment, has been delayed while the company conducts a second study.

Merck said it looked at every part of its business during the overhaul. Part of the strategy shift involves creating a new unit to sell oncology drugs that use the body’s own immune system to kill cancer cells. The company will do more outside deals to bolster its pipeline.

The company said it wasn’t changing its 2013 earnings forecast. It will take a $900 million to $1.1 billion charge this year as part of the restructuring costs, mostly in the third quarter. The restructuring will cost the company about $2.5 billion to $3 billion.