Merck cuts staff and R&D

Pharmaceutical giant Merck & Co. is cutting jobs and research in a move that will likely hurt innovation and drugs. As revenue declines across the industry, companies are looking for ways to increase the bottom line.

Reuters had this story:

Merck & Co, taking a cue from rival drugmakers that have slashed research spending to bolster earnings, said it will cut annual operating costs by $2.5 billion and eliminate 8,500 jobs, or more than 10 percent of its global workforce.

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

It will jettison research products with less likelihood of success. It plans to pull the plug on some drugs already in late-stage trials, and will license some products to other companies.

The job cuts would be in addition to expected remaining cuts of 7,500 positions from a 2011 restructuring that involved elimination of 13,000 positions – largely of administrative personnel but also related to sale or closure of manufacturing sites.

Merck, like Pfizer Inc, AstraZeneca Plc and Sanofi in recent years, is reaching again for its axe because of competition from generic medicines, stalled sales growth of its important drugs and failures or delays for high-profile experimental drugs.

But half the job cuts from Merck’s new restructuring will come from research and development, which has been a protected sphere for the drugmaker, which has long been renowned for its research prowess but has stumbled in recent years.

The Wall Street Journal added this context about the cuts, saying that despite recent revenue gains Merck is still behind on developing new drugs:

Advancements in the understanding of genetics and biology have increasingly fueled drug development in recent decades, and many of the most promising new drugs have been aimed at niche disease populations, developed in the labs of biotechnology competitors considered closer to the cutting edge of science. Merck has begun to catch up, most recently with an experimental cancer drug that harnesses the immune system to fight tumor cells. But some former executives worry that the company wasn’t quick enough to adapt and that its declining size mirrors the shrinking ambitions of other large drug makers.

“Merck and lot of the big companies wrongly tried to target blockbusters for major, mega-conditions, and that strategy failed,” said Eve Slater, a former research and development executive who left Merck in 2002. Now, “they make small acquisitions and have risk absorbed by the smaller biotechs that are populated by their former scientists.”

Merck Chief Executive Kenneth Frazier said in an interview Tuesday that the changes should help it improve its return on investment, focusing on diseases like cancer, Alzheimer’s disease and the hepatitis C virus. Mr. Frazier said that, despite the cuts, Merck was committed to research and development and would continue to invest for the long term.

USA Today noted that Merck also planned to relocate its headquarters:

The overhaul is part of a broader strategy being set by the company’s R&D chief Roger Perlmutter. Frazier hired Perlmutter in April as a replacement for Peter Kim, following developmental setbacks for experimental drugs in cardiovascular, surgery and osteoporosis.

The company also said, on Tuesday, in a separate news release, that it will move its global headquarters from Whitehouse Station to its existing facilities in Kenilworth, N.J. The company had previously announced that it would close its Whitehouse Station building and relocate its global headquarters to Summit, N.J.

But after re-evaluating its real estate needs in the state, Merck determined that it could achieve greater cost savings and operational synergies by closing both its Summit campus and its main Whitehouse facility, according to the Merck release.

The transition is expected to begin next year and be completed in 2015.

The Journal also highlighted Merck’s shift in strategy toward acquiring experimental drugs:

On Tuesday, the company said it would discontinue or out-license certain drugs in late-stage development, and put greater emphasis on acquiring experimental drugs from outside the company, which could help minimize exposure to costly research flops. Such a strategy is a departure from the days when large firms prided themselves on developing new drugs internally, said Dr. Slater, the former Merck executive.

“They’re sitting 30,000 feet in the clouds waiting for the biotechs to develop the good targets,” said Dr. Slater, now an associate clinical professor of medicine at Columbia University. “Merck is trying to reorient itself as a biotech [venture capitalist].”

Merck said it would continue its focus in areas like vaccines and diabetes, where it already has sizable footprints with drugs like Januvia, which had sales of $1.07 billion in the quarter ended June 30.

What is troubling about this development is what will happen to innovation and finding new ways to cure diseases. Discovering new treatments and funding for the research is difficult enough. For many ailments, drugs only come from big companies with the resources to find them. If one of the largest in the business is cutting research it doesn’t bode well for those hoping for new ways to cure their diseases.

I’d like to see some follow-up stories on how this move will affect patients and their families, particularly given the new health care laws and reimbursement programs.