Merck Drops More Employees to Finance Makeover

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In October, Merck (NYSE:MRK) announced a radical restructuring, but with limited details. Then, in the middle of December, the Wall Street Journal obtained details on the company’s sweeping plan to reorganize its research and development operations; rather than rely on the pharmaceutical manufacturer’s legendary in-house research labs to develop the majority of drugs in its new-product pipeline, four “innovation hubs” will be set up near Boston, San Francisco, London, and Shanghai.

The restructuring plan, the company’s fourth since 2008, is not solely aimed at cutting costs. After seven years without a blockbuster drug, the company also needs to rethink its inward-looking approach to the research and development of new pharmaceuticals. Problems with R&D have made it more difficult for Merck to survive the expiration of patents on top-selling drugs. To begin the transformation, the company hired a new chief of R&D — Roger Perlmutter, who has been tasked with organizing company personnel and refocusing the scope of research and development projects. Since the narrower focus on new product development and the transition to the use of “innovation hubs,” Merck has been shrinking its workforce. In October, the pharmaceutical manufacturer said it would lay off 8,500 workers, or approximately 20 percent of its staff, while cutting $2.5 billion. On December 31, the company announced another 150 jobs would be eliminated as well.

“We are improving productivity and focusing our R&D and commercial resources more precisely to enable our investments in the best opportunities for innovation and growth,” Merck’s Chief Executive Officer Kenneth Frazier said in the company’s third-quarter earnings statement, describing the motivation for the restructuring plan. That earnings report highlighted the company’s troubles. Cost-cutting measures that have already been implemented helped results exceed expectations, but nevertheless, analysts remained concerned about growth prospects for the company’s most important product, the Januvia diabetes treatment — one of the company’s last remaining top sellers.

Compared to its rivals like Johnson & Johnson (NYSE:JNJ), Novartis (NYSE:NVS), and GlaxoSmithKline (NYSE:GSK), Merck has made fewer acquisitions deals than its competitors and kept more drug research and development in-house. That strategy has left Merck with a weak new-product pipeline, even though Merck’s research laboratories once led the industry; it was there that the first measles vaccine was developed and the first marketed, cholesterol-lowering statin drug.

The company’s researchers were known for guiding the research process from discovery to the final stages of development. But the pharmaceutical manufacturer has not found a blockbuster drug since Januvia and cervical-cancer vaccine Gardasil were approved by the Food and Drug Administration in 2006.

Merck’s move toward the innovation hub is hardly unique; its an evolutionary pattern that has been guiding the entire pharmaceutical industry in a new direction. The reason for change is due to the problems larger companies have developing new products. In simple terms, larger pharmaceutical companies have difficulties because they are too big and too bureaucratic But, the issue is also more complex; the complicated physiology of the human body makes targeting a disease or other problem no easy task.

“If we’re discovering drugs, the problem is that we just don’t know enough. We really understand very little about human physiology,” Roger Perlmutter, Merck’s new chief of R&D, told Forbes’ Matt Herper in September. “We don’t know how the machine works, so it’s not a surprise that when it’s broken, we don’t know how to fix it. The fact that we ever make a drug that gives favorable effects is a bloody miracle because it’s very difficult to understand what went wrong.”

At this point, it is unclear whether Merck’s efforts to transform its focus from research and development to search and development will be a better strategy. However, at the very least, Merck will keep pace with its competitors. “The advantage of having these innovation centers is they capture the academic research at a very early stage,” Kenneth Kaitin, director of the Tufts Center for the Study of Drug Development in Boston, told the Journal. The company’s hub systems are similar to approaches taken by Pfizer (NYSE:PFE), Johnson & Johnson, and GlaxoSmithKline, all of which have satellite research facilities.

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