Merck to slash annual costs by $2.5 bln, cut 8,500 jobs

Reuters

By Ransdell Pierson

Oct 1 (Reuters) - Merck & Co, taking a cue fromrival drugmakers that have slashed research spending to bolsterearnings, said it will cut annual operating costs by $2.5billion and eliminate 8,500 jobs, or more than 10 percent of itsglobal workforce.

Merck, whose shares rose 2.3 percent, said it aims to narrowits focus to products with the best chance of winning regulatoryapproval and achieving substantial sales.

It will jettison research products with less likelihood ofsuccess. It plans to pull the plug on some drugs already inlate-stage trials, and will license some products to othercompanies.

The job cuts would be in addition to expected remaining cutsof 7,500 positions from a 2011 restructuring that involvedelimination of 13,000 positions - largely of administrativepersonnel but also related to sale or closure of manufacturingsites.

Merck, like Pfizer Inc, AstraZeneca Plc andSanofi in recent years, is reaching again for its axebecause of competition from generic medicines, stalled salesgrowth of its important drugs and failures or delays forhigh-profile experimental drugs.

But half the job cuts from Merck's new restructuring willcome from research and development, which has been a protectedsphere for the drugmaker, which has long been renowned for itsresearch prowess but has stumbled in recent years.

"We're not doing indiscriminate cuts in research anddevelopment, we're doing surgery around where we should invest,"Merck Chief Executive Kenneth Frazier said in an interview.

Frazier said the company is now evaluating which drugs ordisease areas to discard and which to keep, but few decisionshave yet been made.

"And by attacking our cost bases, we will free up resourcesfor mergers and acquisitions and business development," Fraziersaid, noting the company's strong interest in buying new drugsor licensing them from other drugmakers.

About 40 percent of the cost-cutting from the newinitiative, or $1 billion, will be realized by the end of 2014.The cuts will come equally from marketing and administrativeareas and from research and development, Merck said. The rest ofthe cuts will be completed by the end of 2015, it said.

SLOWER SALES GROWTH

One of the more worrisome challenges facing Merck is slowingsales growth for its biggest franchise, the diabetes drugs Januvia and Janumet which have combined annual sales of $6billion. They have been Merck's growth engine over the pastthree years but are stalling due to similar rival drugs andnewer classes of diabetes treatments.

And sales of Merck's former top seller, its asthma drugSingulair, have plunged 80 percent due to generic competition,and other Merck medicines will also face cheaper generics soon.Singulair sales reached $6 billion a year at their peak.

Pfizer Inc became an industry trendsetter inaggressive cost-cutting in early 2011 when it announced plans tochop annual research spending by as much as $3 billion. It wenton to close numerous research sites and has halted or curtailedspending for research on drugs for allergy, urology, internalmedicine and other therapeutic areas requiring large salesforces.

Wall Street has cheered Pfizer's moves, especially since thecompany has launched many new medicines since the changes,including cancer drugs. Moreover, it has divested its animalhealth and infant formula businesses, and plans to return muchof the proceeds to investors through share buybacks.

Merck dug in its heels after Pfizer's dramatic streamlining,saying it planned to hold steady with its research spending inorder to advance its promising medicines through clinicaltrials.

Alex Arfaei, an analyst with BMO Capital Markets, said thecost-cutting will be helpful in the short term, especially nextyear, when he expects Merck revenues to be flat due to increasedpressure on Januvia.

But he said he was concerned that Merck was putting too muchfaith in a handful of experimental drugs, including a new typeof cancer drug called a PD-1 inhibitor that works by boostingthe immune system, a new type of treatment for Alzheimer'sdisease called a BACE inhibitor, and improved versions of itsGardasil vaccine to prevent cervical cancer and its treatmentfor hepatitis C.

"Overall, today's announcement makes us more cautious aboutthe potential of Merck's pipeline" of experimental drugs, Arfaeisaid.

Merck in April replaced its long-time research chief, PeterKim, with Roger Perlmutter, a former Amgen Inc researchhead who is expected to better acquaint Merck with biotech drugs- injectable drugs made in living cells that have becomestandard treatments for a wide array of diseases, includingcancer and rheumatoid arthritis.

Merck has focused mainly on development of conventionaldrugs, or pills, although it is a also leader in vaccines.

The company had several triumphs under Kim, includingdevelopment of Januvia, its Gardasil vaccine to prevent cervicalcancer, its Zostavax shingles vaccine, and its Isentresstreatment for HIV.

But more recently, it has been hurt by failed trials ofcholesterol treatment Tredaptive and migraine drug telcagepant,and a regulatory delay for a new type of osteoporosis medicinecalled odanacatib.

Moreover, cost savings from Merck's 2009 purchase of rivalSchering Plough have mostly dried up and are no longer able toboost company earnings.

Merck said it still expects full-year 2013 earnings of $3.45to $3.55 per share, excluding special items. It earned $3.82 pershare last year.

It plans to take restructuring charges of $900 million to $1billion this year, mostly in the third quarter.

The company on Tuesday also said it plans by 2015 to moveits global headquarters from Whitehouse Station, New Jersey, toexisting facilities in Kenilworth, New Jersey. It previouslyplanned to move its headquarters to Summit, New Jersey. Merck said it decided it could achieve more cost savings byclosing its Summit site and its main Whitehouse Stationfacility.

Merck shares have risen 17.3 percent this year, in line withadvances seen for the ARCA Pharmaceutical Index of large U.S.and European drugmakers.

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