Refusing to cater to Wall Street
Kenneth Frazier had already inspired a fundamental rethinking of pharma strategy before he took the helm at Merck ($MRK) last year. As the drugmaker's chief counsel, he authored its defense of the massive Vioxx litigation. His choice to fight patient lawsuits one at a time was considered risky and time-consuming at first, but its success inspired similar tactics from other lawsuit-plagued drugmakers. And it ended up vaulting Frazier to the top of Merck's pharma division--and from there, to his current post.
Frazier's latest tough-and-surprising move: Continuing to invest billions in R&D when the company faces new generic rivals to top-earning products. After several years of dismal R&D productivity, the pharma industry as a whole has been slashing research spending, preferring to buy in drug candidates and let smaller, more nimble companies take the early, upfront risks. The less-is-more theory has another, perhaps more important, goal as well: short-term investor satisfaction. With sales eroding, cost cuts help pump up earnings and finance dividends. It can help prop up stock prices (in theory, anyway), or at least buy time for a company to rebuild its product portfolio, one way or another.
Not Frazier. Soon after he took the reins, Frazier pulled the company's earnings projections for 2013, saying he wanted Merck to focus on delivering long-term gains, not achieving short-term numbers. No "indiscriminate" cost-cutting for Merck. No worries about becoming pharma's biggest research spender, with an $8 billion budget. "It isn't we couldn't cut costs enough to make long-term guidance," he said at the time. "We couldn't do that fast enough without sacrificing opportunities."
Investors weren't happy, perhaps because Frazier's strategy contrasted so strongly with Pfizer's plan to cut $2 billion out of R&D and lay off thousands to stay in line with 2012 forecasts. Analysts questioned the CEO's wisdom, too. "Merck could end up wasting billions," Miller Tabak's Les Funtleyder said in The Wall Street Journal.
Frazier has tempered his stance somewhat; in July, he said newly announced job cuts would "affect R&D the same way that it affects the rest of the company." And last month, Merck announced its first dividend increase in 7 years. "While we're confident in our long-term future, we also recognize we can't ask you, our investors, to wait for us to achieve all of our long-term aspirations," he said.
But Frazier still plans to maintain his R&D focus, in spite of the fact that Merck stock has lagged the cost-cutting Pfizer's. The R&D layoffs mentioned in July were said to be focused on administrative support in those divisions, not on scientists. He's eyeing more partnerships to fill out Merck's pipeline. "When one runs a company like Merck that has long lead times in terms of development," he recently said. "You're not necessarily running the company for the immediate reaction of the stock market."