Merck announces new research and development plan to save another $1 billion

By E. Janene Geiss

Philadelphia, Dec. 15 - Merck & Co. Inc. announced Thursday a plan to save an additional $1 billion through 2010 by implementing a new business design process and focus its research and development efforts in nine disease areas.

"Merck will remain a research-driven pharmaceutical company, but we need to change our approach to virtually every aspect of our business, and we must act with a sense of urgency," Merck chief executive officer and president Richard T. Clark said in the release.

The plan is the latest in a series of changes the company is making to try to recover from pending Vioxx lawsuits, falling revenue and profit and looming patent expirations on some of its top selling drugs.

Last month, Merck announced the first phase of its global restructuring program, which included the immediate start of cuts to its manufacturing division, an effort that would lower pretax costs by $3.5 billion to $4 billion through 2010. It also included eliminating 7,000 jobs, 11% of Merck's work force, officials have said.

The latest plan includes a new research and development model designed to increase productivity and improve the probability of success by prioritizing resources on Alzheimer's disease, atherosclerosis, cardiovascular disease, diabetes, novel vaccines, obesity, oncology, pain and sleep disorders, according to a company news release.

Officials said the areas were carefully chosen based on a set of criteria including unmet medical needs, scientific opportunity and commercial opportunity. Within these therapeutic areas, Merck said it will commit resources to achieve research breadth and depth and to develop best-in-class targeted and differentiated products.

Merck said it also will make focused investments to pursue specific mechanisms in antibiotics, antifungals, antivirals (hepatitis C virus, HIV), asthma, chronic obstructive pulmonary disease, neurodegeneration, ophthalmology, osteoporosis, schizophrenia and stroke.

To create the most effective model for the development of a late-stage pipeline, Merck Research Laboratories will design and implement more efficient, global, consistent clinical development operational processes with the goal of reducing product development cycle times, officials said.

Efficiencies generated in late-stage cycle times are expected to reduce the development process by as much as nine months by 2007, officials said. Reductions in early development cycle times, in some cases from 3.5 years to 2 years, have already been achieved for critical products moving through the pipeline, they said.

Better efficiency in sales

To improve its commercial selling model, Merck said it will continue to streamline and restructure its marketing and sales operations worldwide to improve their effectiveness and generate greater efficiencies.

The company said it has already has reduced the number of sales representatives promoting the same product by 50% versus historical levels. Merck said it will place more emphasis on active engagement with key opinion leaders to accelerate the development and diffusion of scientific information and devote additional resources to utilizing technology and demonstrating product value to physicians, as well as payers and consumers who have increasing influence on prescription decisions.

In the United States, this approach has already resulted in considerable productivity improvements in pilot programs and is expected to lower the company's spending per brand by 15% to 20% by 2010, while maximizing sales performance.

To provide additional support to its upcoming vaccine launches, Merck said it is redeploying 1,500 sales representatives who currently promote its major in-line products to support the launch of new vaccines.

Confirms guidance

And the company reaffirmed its 2005 and 2006 earnings guidance. Merck said it anticipates full-year earnings per shares of $2.47 to $2.51, excluding the impact of net tax charges and the restructuring charges related to previously announced headcount reductions and site closures. Merck said it anticipates reported full-year 2005 earnings per share of $2.04 to $2.10.

Anticipated 2006 earnings per share were affirmed at $2.28 to $2.36, including a $0.07 impact of stock-option expensing, but excluding the restructuring charges related to site closures and position eliminations. Merck said it anticipates reported 2006 earnings per share of $1.98 to $2.12.

"Merck's new and in-line pharmaceutical products and vaccines are expected to drive revenues at a compound annual growth rate of 4% to 6% from 2005 through 2010, including 50% of the revenues from the joint ventures ... from which Merck derives equity income," Judy C. Lewent, executive vice president and chief financial officer, said in the release.

"We also expect that we can fully support our expanding pipeline with low- to mid-single digit compound annual growth in research funding over the same period and hold marketing and administration expenses flat from 2006 through 2010, excluding stock option expenses and restructuring costs," Lewent added.

Several class actions lawsuits have been filed against the company in state and federal courts alleging personal injury or economic loss with respect to the purchase or use of Vioxx, officials said. The trial in Plunkett v. Merck, a federal trial in Houston, Texas, was recently declared a mistrial as the jury was unable to reach a verdict.

The company said it is prepared to retry the case if necessary.

Merck is a Whitehouse Station, N.J., pharmaceutical company.

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