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Merck Plans Further Job Cuts
By TESS STYNES And PETER LOFTUS
Merck & Co. said it plans to slash its 81,000-strong workforce by 20% over
the next two years as part of a broad restructuring of its research-and-
development practices, a move aimed at adapting the century-old
pharmaceutical company to shifting market dynamics.
The layoffs, some of which were previously disclosed, in combination with
the closing of a New Jersey facility and the discontinuation of some late-
stage pipeline drugs, are intended to save the company $2.5 billion annually
by 2015, the company said.
Merck Chief Executive Kenneth Frazier said in an interview Tuesday that the
company is cutting costs and reorganizing its operating model to better
target its resources at opportunities that have the potential to deliver the
best return on investment, including R&D programs.
Costly research flops, competition from generic drugs, stringent regulatory
requirements and cost-conscious insurance companies and other payers have
prompted many drug makers to reduce research spending and reorganize their
labs.
Merck is aiming to focus on areas including diabetes, acute hospital care,
vaccines and oncology. It also intends to prioritize its research efforts on
its Alzheimer's treatment and HPV vaccine, among other things. Meanwhile,
the pharmaceutical giant said it would discontinue selected late-stage
clinical development assets while making externally sourced programs a
greater component of its pipeline strategy.
Geographically, the company plans to increase its focus in 10 markets that
account for the majority of revenue in its pharmaceutical and vaccine
business: the U.S., Japan, France, Germany, Canada, U.K., China, Brazil,
Russia and Korea.
Merck has had some R&D pipeline setbacks in the past couple of years,
including negative study results for heart drugs Tredaptive and vorapaxar,
as well as a delay in filing for regulatory approval of a new bone-building
drug, odanacatib. And like peers, Merck has been hurt as major drugs, such
as allergy and asthma drug Singulair, have lost market exclusivity.
Mr. Frazier said Merck's R&D MRK +2.38% setbacks of recent years are a
reminder of the inherent uncertainty of drug and vaccine research.
"We have to survive these failures" in order to have the resources to invest
in promising opportunities such as Merck's immune-based cancer therapy, MK-
3475, he said.
The pharmaceutical company had hinted that changes in the research-and-
development operations were in the offing in June when it said it would be
cutting jobs and stripping a layer of senior management from its R&D arm, as
its new division chief Roger Perlmutter seeks to turn around a unit he said
was marked by "the complexity of our organizational design."
But the cuts may be seen a setback for Mr. Frazier, who made a bet to invest
more in research and development, despite Wall Street's fears that the
company wouldn't meet its long-term financial forecasts, when he assumed the
post at the beginning of 2011. By contrast, Ian Read, who took the helm of
rival Pfizer Inc. PFE +0.57% around the same time, vowed to slash his
company's spending on drug research and development and buy back a big chunk
of stock.
But Mr. Frazier said Tuesday that Merck's latest cost-cutting isn't
inconsistent with his public remarks in 2011 defending R&D spending. He said
his stance in 2011 was intended to signal that he wouldn't make
indiscriminate R&D-related cost cuts for the purpose of propping up short-
term earnings.
"You've got to make sure you establish an infrastructure that will allow you
to have R&D in good times and bad," Mr. Frazier said.
The pharmaceutical company expects restructuring costs of between $2.5
billion and $3.0 billion related to the revamp, including $900 million to $1
.1 billion in 2013, a majority of which will be recorded in the third
quarter. However, the company reaffirmed its 2013 earnings guidance, which
excludes the restructuring items.
Merck said it also expects to reduce its global real-estate footprint,
particularly in New Jersey, where the company plans to move its headquarters
from Whitehouse Station, N.J., to existing facilities in Kenilworth, N.J.,
about 30 miles east. The company previously had planned to relocate to
Summit, N.J., but determined that closing the Whitehouse Station and Summit
locations would lead to greater cost savings and operations synergies.
The company said its Summit animal-health and consumer-care divisions would
be relocated to another facility in New Jersey. And certain manufacturing,
laboratory and other functions currently in Summit will be moved to other
facilities in New Jersey or Pennsylvania.
Meanwhile, Merck said it would continue aiming to return cash to
shareholders through both its dividend and stock repurchase programs.
Shares were up 2.4% at $48.74 in 4 p.m. trading Tuesday on the New York
Stock Exchange, and have climbed 19% so far this year.
By TESS STYNES And PETER LOFTUS
Merck & Co. said it plans to slash its 81,000-strong workforce by 20% over
the next two years as part of a broad restructuring of its research-and-
development practices, a move aimed at adapting the century-old
pharmaceutical company to shifting market dynamics.
The layoffs, some of which were previously disclosed, in combination with
the closing of a New Jersey facility and the discontinuation of some late-
stage pipeline drugs, are intended to save the company $2.5 billion annually
by 2015, the company said.
Merck Chief Executive Kenneth Frazier said in an interview Tuesday that the
company is cutting costs and reorganizing its operating model to better
target its resources at opportunities that have the potential to deliver the
best return on investment, including R&D programs.
Costly research flops, competition from generic drugs, stringent regulatory
requirements and cost-conscious insurance companies and other payers have
prompted many drug makers to reduce research spending and reorganize their
labs.
Merck is aiming to focus on areas including diabetes, acute hospital care,
vaccines and oncology. It also intends to prioritize its research efforts on
its Alzheimer's treatment and HPV vaccine, among other things. Meanwhile,
the pharmaceutical giant said it would discontinue selected late-stage
clinical development assets while making externally sourced programs a
greater component of its pipeline strategy.
Geographically, the company plans to increase its focus in 10 markets that
account for the majority of revenue in its pharmaceutical and vaccine
business: the U.S., Japan, France, Germany, Canada, U.K., China, Brazil,
Russia and Korea.
Merck has had some R&D pipeline setbacks in the past couple of years,
including negative study results for heart drugs Tredaptive and vorapaxar,
as well as a delay in filing for regulatory approval of a new bone-building
drug, odanacatib. And like peers, Merck has been hurt as major drugs, such
as allergy and asthma drug Singulair, have lost market exclusivity.
Mr. Frazier said Merck's R&D MRK +2.38% setbacks of recent years are a
reminder of the inherent uncertainty of drug and vaccine research.
"We have to survive these failures" in order to have the resources to invest
in promising opportunities such as Merck's immune-based cancer therapy, MK-
3475, he said.
The pharmaceutical company had hinted that changes in the research-and-
development operations were in the offing in June when it said it would be
cutting jobs and stripping a layer of senior management from its R&D arm, as
its new division chief Roger Perlmutter seeks to turn around a unit he said
was marked by "the complexity of our organizational design."
But the cuts may be seen a setback for Mr. Frazier, who made a bet to invest
more in research and development, despite Wall Street's fears that the
company wouldn't meet its long-term financial forecasts, when he assumed the
post at the beginning of 2011. By contrast, Ian Read, who took the helm of
rival Pfizer Inc. PFE +0.57% around the same time, vowed to slash his
company's spending on drug research and development and buy back a big chunk
of stock.
But Mr. Frazier said Tuesday that Merck's latest cost-cutting isn't
inconsistent with his public remarks in 2011 defending R&D spending. He said
his stance in 2011 was intended to signal that he wouldn't make
indiscriminate R&D-related cost cuts for the purpose of propping up short-
term earnings.
"You've got to make sure you establish an infrastructure that will allow you
to have R&D in good times and bad," Mr. Frazier said.
The pharmaceutical company expects restructuring costs of between $2.5
billion and $3.0 billion related to the revamp, including $900 million to $1
.1 billion in 2013, a majority of which will be recorded in the third
quarter. However, the company reaffirmed its 2013 earnings guidance, which
excludes the restructuring items.
Merck said it also expects to reduce its global real-estate footprint,
particularly in New Jersey, where the company plans to move its headquarters
from Whitehouse Station, N.J., to existing facilities in Kenilworth, N.J.,
about 30 miles east. The company previously had planned to relocate to
Summit, N.J., but determined that closing the Whitehouse Station and Summit
locations would lead to greater cost savings and operations synergies.
The company said its Summit animal-health and consumer-care divisions would
be relocated to another facility in New Jersey. And certain manufacturing,
laboratory and other functions currently in Summit will be moved to other
facilities in New Jersey or Pennsylvania.
Meanwhile, Merck said it would continue aiming to return cash to
shareholders through both its dividend and stock repurchase programs.
Shares were up 2.4% at $48.74 in 4 p.m. trading Tuesday on the New York
Stock Exchange, and have climbed 19% so far this year.
