Merck just lost one of its key defenders on Wall Street.
Long one of the most prominent analysts to endorse Merck's ($MRK) essential R&D strategy in recognition of the company's sterling tradition in drug development--with caveats about its growing weakness over the past 6 years--Bernstein's Tim Anderson opted on a downgrade today, disappointed by the pharma giant's long-term prospects in the face of mounting generic competition as it begins a lengthy process to overhaul its R&D operations.
As Anderson noted, Bernstein upgraded Merck in the wake of the big 2009 merger with Schering-Plough. But four years later, Merck is either facing or soon will confront an assault on a third of its drug franchises. And R&D has been a disappointment.
"While the company is embarking upon a series of maneuvers to 'fix' R&D, this will likely take years to accomplish," noted Anderson. "Part of our original investment thesis with MRK was that its legacy as a best-in-class R&D organization would predict meaningful future new product flow, but as investors are well aware, MRK's execution in R&D since 2006 has been disappointing."
About the only program that Anderson can get excited about now is MK-3475, Merck's high-profile immunotherapy play in cancer. And the restructuring Merck announced, which Anderson had not expected would be so far-reaching, offers little solace.
"MRK's announcement last week of a larger, new round of cost-cutting does little to bolster the investment case," he adds. "It is, of course, good to slim down, but it simultaneously supports the notion that MRK is under-performing on its execution versus prior plan. Cutting R&D, like MRK will be doing, may or may not be a good thing over the longer-term."
Leerink Swann analyst Seamus Fernandez and Anderson recently sat down with Merck's new R&D chief, Roger Perlmutter, only to come away with different ideas about what Perlmutter meant by the surgery he planned for R&D. Subsequently, the company announced a vaguely worded plan to downsize substantially as it cuts $2.5 billion out of the company's expenses, with about half of that coming from R&D.
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