Merck CEO Seeks Drug Add-Ons, Not Large Tax-Inversion Deals

Merck & Co., the second-biggest U.S. drugmaker, is staying in the U.S. and sticking to a bolt-on acquisition strategy, shunning the route taken by its biggest rival, Pfizer Inc.

Merck is not interested in large scale purchases that are “very time consuming and distracting to what we’re here to do, which is invest in new medicines,” Ken Frazier, Merck’s chief executive officer said in an interview today. Merck also isn’t looking for a cross-border deal to lower its tax rate, he said.

Instead, “we’re trying to get Congress to look at how all U.S. firms are at a huge disadvantage” and encouraging tax reform, Frazier said by telephone.

Frazier is sticking to his company’s long-time strategy despite a flurry of deals in the pharmaceutical industry, many designed to lower tax rates. This includes AbbVie Inc.’s $55 billion takeover of Dublin-based Shire Plc, announced July 8, which will make it the largest U.S. company to move its legal address abroad for lower taxes. Generics maker Mylan Inc. and medical device maker Medtronic Inc. have also announced cross-border acquisitions.

Pfizer, the biggest U.S. drugmaker, tried for its own deal with a proposed $117 billion takeover of London-based AstraZeneca Plc. The offer was rebuffed and talks could resume as soon as next month if AstraZeneca invites Pfizer back to the table, or in November after a U.K.-imposed waiting period.

Ian Read, Pfizer’s chief executive officer, said in a conference call with analysts today that the company was looking at a “wide spectrum of M&A transactions.”

Beating Estimates

Merck today reported second-quarter profit that topped analysts’ estimates by 4 cents as it cut costs and realigned its drug development focus. Net income more than doubled to $2 billion, or 68 cents a share, from $906 million, or 30 cents, a year earlier.

The company last year said it would fire 8,500 workers in a move to save $1 billion, trimming research and development, sales and management. Since then, Merck has been reprioritizing its research focusing on drugs that use the body’s own immune system to fight cancer and treatments for hepatitis C and metabolic disease.

Frazier said he would look to do more bolt-on acquisitions like the purchase of Idenix Pharmaceuticals Inc. in June for its experimental hepatitis C drug. Merck is developing a four to six week therapy that will compete with Gilead Sciences Inc.’s $1000-per-pill treatment Sovaldi.

Drug Response

Merck sees a “high likelihood” of a good response at four weeks, Roger Perlmutter, president of Merck Research Laboratories, said during a conference call with analysts today. Gilead is also working to lower the duration of its regimen, which is currently 12 weeks long.

“I would say, the shorter the better, but if it’s highly effective at six weeks, it would still be a benefit to patients around the world,” Frazier said.

Merck also is looking to augment its animal health business, Frazier said. He declined to say what type of access Merck was looking for, saying Merck is “scanning the entire market place and we see things that are intriguing to us.”

The drugmaker cut research and development costs by 21 percent to $1.7 billion during the quarter, and reduced marketing and administrative expenses by 5 percent to $3 billion, according to the statement.

Combined sales of Merck’s top product, the diabetes pill Januvia and related drug, Janumet, increased 2 percent to $1.6 billion. The drug has faced increased competition as new therapies come to market. Revenue fell 1 percent to $10.9 billion.

$741 Million Gain

Results also benefited from a $741 million gain after AstraZeneca Plc exercised its option to buy Merck’s interest in the drugs Nexium and Prilosec.

Merck raised the bottom end of its 2014 adjusted earnings forecast to $3.43 to $3.53 per share. The company’s previous forecast of $3.35 to $3.53 a share included the potential impact of a Venezuelan Bolivar devaluation, excluded in today’s guidance.

Merck’s shares gained 1.1 percent to close at $58.58 in New York trading. The company has gained 21 percent in the last 12 months.

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