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) CEO Richard Clark unveiled his plan for remaking the ailing drug outfit at the company's annual analyst meeting on Dec. 15. His message was a simple one: Whether it is in manufacturing, marketing, or drug research, Merck needs to become a lean, efficient machine. And while the plan was hardly revolutionary -- other drugmakers including Pfizer (PFE
) and Bristol-Myers Squibb (BMY
) have been making similar moves -- Clark seems to understand the harsh new reality of the drug business these days.
Even more striking was his acknowledgement of how far Merck has fallen. "While we were once the envy of the industry, "that's not the case today," Clark told attendees at the company's Whitehouse Station, N.J., headquarters (see BW, 9/5/05, "The Pain Is Just Beginning").
His remedy: hacking away at Merck's cost structure. Back in November the company announced a restructuring that would save up to $4 billion by 2010 and cut 7,000, or 11% of Merck's jobs (see BW Online, 11/28/05, "Merck's Cure: No Tonic on the Street"). Today he announced steps to cut an additional $1 billion in costs through 2010. That will involve rethinking how it markets its drugs to physicians.
MARKETING MOVES. Clark says the company will spend 15% to 20% less on average in the U.S. promoting each of its brands in 2010. Among the tools: more electronic pitches to doctors and redeploying some sales people toward new product launches. The company is also narrowing its research focus, zeroing in on nine areas such at Alzheimer's disease and cardiovascular conditions.
Merck will reduce its attention to other categories, including asthma and antibiotics. Clark says the key will be how Merck actually implements the plan. "What we really need to do now is execute the damn thing," he contends.
Still, some on Wall Street expressed skepticism over the new earnings goals. Clark vowed that Merck's earnings per share, excluding charges, would grow at a double-digit pace between now and 2010. But S.G. Cowen analyst Stephen Scala projects Merck's earnings will decline each year through 2009. "We don't see anything close to that" double-digit rate, Scala says.
NEW COMPETITION. The big reason for that is Merck's looming patent expirations. Over the next several years the company will face generic competition on a number of blockbuster drugs, most notably the $4.5-billion cholesterol-lowering drug Zocor, which expires next year.
And Merck, once known for its vaunted research operation, has an alarmingly thin pipeline. The big new compound the company unveiled at the meeting: a twist on the old drug niacin which dates back to 1955. Niacin has been shown to raise HDL, or good cholesterol. But many patients experience an annoying flushing or tingling when taking the drug, which causes many to stop therapy or cut the dose.
Merck is testing a compound that prevents that flushing. So they are betting that by combining that anti-flushing product with niacin they can build a solid franchise. But for a company that has pioneered novel new therapies in heart disease and AIDS in the past, the niacin product hardly seems a sign Merck is about to reclaim its title as the industry leader (see BW, 9/5/05, "Drugs Get Smart").
RAISING ISSUES. The product could also raise some thorny issues. For one thing, Merck hopes to market the improved niacin product in combination with Zocor, which lowers LDL, or bad cholesterol. But the drugmaker also has a partnership with Schering-Plough (SGP
) to sell a combination of Zocor and another cholesterol cutting drug, Zetia.
A niacin-Zocor combination could be a direct challenge to the Zetia-Zocor product. That could not only irk Schering-Plough, but give future Merck partners reason to worry about linking up with the drug giant.
That would be bad news for Clark. Merck, like other drugmakers, is increasingly on the hunt for partnerships with other companies that could strengthen its product lineup. Unless Clark can strike more of those deals -- and make them pay off -- Merck will be hard pressed to regain its rivals' envy.