Bloomberg News

Merck KGaA to Cut Employment After Drug Development Failures

February 28, 2012

(Updates with analyst comment in fourth paragraph.)

Feb. 24 (Bloomberg) -- Merck KGaA plans to cut jobs across its drug and chemical businesses after setbacks in developing medicines for cancer and multiple sclerosis.

Executives will begin consulting with worker representatives on the reductions, Darmstadt, Germany-based Merck said today in a statement. It’s too soon to announce detailed plans for reducing costs or jobs, which will take place at all businesses and in all regions, the family-controlled company said.

The cuts are needed to improve margins as Merck’s top- selling multiple sclerosis drug Rebif faces increased competition from newer therapies such as Novartis AG’s Gilenya, said Jack Scannell, an analyst at Sanford C. Bernstein Ltd. in London. The company has also had setbacks in drugs developed by the Serono unit it bought for 16.6 billion Swiss francs ($18.5 billion) in 2007.

“The Serono pipeline has completely and utterly failed,” Scannell said by phone today. “They’re left with a margin structure and cost base which simply isn’t commensurate with the volume of sales they have.” He recommends buying the stock on optimism Merck’s new management will “turn things around.”

Merck hired Matthias Zachert as chief financial officer last year from Lanxess AG, a German chemical company. Stefan Oschmann, formerly head of emerging markets at Merck & Co., replaced Elmar Schnee as head of pharmaceuticals.

’Unprecedented Market Shifts’

“Over the next two years, Merck needs to address unprecedented market shifts, increasing competition in key product areas and existing inefficiencies in its own organization to ensure the long-term success of its business model,” Chief Executive Officer Karl-Ludwig Kley said in the statement.

Merck fell 1.5 percent to 79.48 euros in Frankfurt, the biggest drop since Jan. 12, giving the company a market value of 17.3 billion euros ($23.3 billion). Merck KGaA isn’t related to Merck & Co. of the U.S. The German company, which reports 2011 earnings on March 6, employs about 40,000 people, according to its website.

In June, the company dropped development of the multiple sclerosis pill cladribine, which had been its most promising experimental medicine. In July 2009, European regulators rejected its cancer drug Erbitux for use in lung tumors.

The company is still studying Erbitux in lung tumors. Oschmann told JPMorgan Chase & Co. analysts in January that the chances of getting the Erbitux approved for that use in Europe were less than 50 percent.

“They need to improve returns in the pharma business,” Adrian Howd, an analyst at Berenberg Bank in London, said in a telephone interview today. “There’s scope for significant margin expansion there.” He recommends buying the shares.

Family Owners

In addition to Serono, Merck bought Millipore Corp., a U.S. supplier of materials and equipment to biotechnology companies, for $6 billion in 2010. The company is also the world’s biggest maker of liquid crystals used in displays for flat-screen televisions, tablet computers, telephones and other electronics.

Merck is 70 percent owned by the Merck family through the parent company E. Merck KG. The roughly 130 family members choose representatives who hire, fire and set compensation for company executives, according to the company’s website.

--Editors: Phil Serafino, Bruce Rule

To contact the reporter on this story: Simeon Bennett in Geneva at sbennett9@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net.


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