Can Merck pull a Pfizer?


Among big pharma players, Merck & Co is one of the big spenders. Yet the billions spent on R&D have generated little in the way of value, a fact of which investors seem to be profoundly aware (Turning headcount into profits: a shifting industry picture, August 8, 2013).

So the announcement yesterday of a new reorganisation in the hope of bringing focus to the group's research engine was greeted with relief by the market. Its executive team has no doubt seen how Pfizer has managed to produce a steady-share price appreciation at the same time as it has hacked away at its costs, and should be keen to repeat that achievement (see table).

Good-bye to you

The big headline from Merck’s big announcement yesterday was 8,500 job cuts on top of 13,000 the group had already planned to take place by the end of 2015- of that 13,000, 7,500 have yet to take place (Merck fails to excite market with job cuts, August 1, 2011). Layoffs are the sort of news that tends to generate short-term bumps in share prices, and yesterday's news did not fail.

This was accompanied by an estimate of $2.5bn in annual cost savings by the end of 2015, which will be roughly evenly split between R&D and selling, general and administrative expenses. Analysts were quick to note that consensus forecasts had already presumed about $1bn in annual savings.

The bigger news for the future of Merck was a decision to focus on four development areas – vaccines, oncology, diabetes and acute care. A special call-out was made to its promising cancer project lambrolizumab with the promise to create a “new, integrated unit” to shepherd its development and commercialisation, should it succeed.

A special focus on lambro, an anti-programmed death-1 (PD-1) antibody, is sensible, given that it is the most valuable asset in Merck’s pipeline (Asco propels PD-1s into most valuable asset rankings, July 24, 2013).

R&D ($bn) SG&A ($bn)
2012 2015* 2012 2015*
Novartis 9.1 9.9 17.3 18.3
Roche 9.0 9.6 11.1 11.6
Merck & Co† 7.9 7.7 12.4 12.2
Pfizer 7.3 6.1 16.3 13.3
Sanofi 6.3 6.5 11.5 12.2
GlaxoSmithKline 5.5 5.6 12.4 13.0
Eli Lilly 5.3 4.9 7.5 6.3
AstraZeneca 4.5 4.6 8.9 9.1
Bristol-Myers Squibb 3.7 3.9 5.0 4.6
*forecast; †before yesterday's announcement.

The changed focus leaves some uncertainty around two other rather important assets in the pipeline: odanacatib, the phase III osteoporosis agent, and anacetrapib, the high-cholesterol project that emerged from Merck’s own labs.

The latter, from the controversial cholesteryl ester transfer protein (CETP) inhibitor class, is in the midst of a massive phase III programme that will not generate results until 2017, and given failure so far in this class it is far from clear whether hundreds of millions of dollars being poured into it will generate any return.

Three other programmes – hepatitis C, human papilloma virus vaccine V503 and Alzheimer’s candidate MK-8931 – were emphasised as key assets. Meanwhile, non-core products are to be licensed out or discontinued.

Roger Perlmutter, Merck's new R&D chief, had supportive words for both odanacatib and anacetrapib, but it is clear that if these remain in the fold they will be outliers in the new research framework.

Looking outside

As will compounds originating from Merck’s own labs. The group does not have the flexibility to terminate huge numbers of partnerships or hand back in-licensed products because such a large part of its pipeline has emerged from its own laboratories or through company acquisitions.

Of 60 compounds Merck has listed in phase II or III, 49 have this provenance – the mega-merger with Schering-Plough accounting for 13 original candidates. Furthermore, in-licensed products like the ovarian cancer treatment EC145 and HPV vaccine V503 are in the New Jersey group’s remaining priority development areas.

“External innovation” are now the watchwords, and presumably the business development division will be given more discretion to write big cheques to early-stage drug discovery companies.

Of course, just because Merck begins sourcing candidates from outside its laboratories does not mean it can generate the change in investor sentiment that Pfizer has managed. Pfizer has succeeded in launching successful drugs in recent years – something Merck has struggled to do.

To contact the writer of this story email Jonathan Gardner in London at or follow @JonEPVantage on Twitter

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