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Analyst urges Merck to overhaul its weak $8B R&D operation

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Merck R&D chief Roger Perlmutter

Roger Perlmutter plans to barely make a dent in Merck's $8-billion-plus R&D budget after taking the top research job. And that leaves at least one prominent analyst pressuring the company to cut much, much deeper.

During Merck's last quarterly call, Perlmutter discussed cautiously reducing R&D spending by about $144 million this year compared to last, following a move to strip away a layer of management in the research division. But Leerink Swann's Seamus Fernandez thinks that in light of Merck's "disappointing Ph III/ registrational pipeline evolution (odanacatib, suvorexant, Bridion U.S.)," along with lackluster financials and the challenges that face all pharma giants, a major restructuring is in order.

Fernandez believes the whole company is in need of a shakeup, but he specifically cites an underperforming R&D group that needs to be reined in by potentially hacking out more than $1 billion in annual costs.

"We estimate that every $1B reduction of operating expenses would add $0.25/share to MRK's bottom line, and would bring MRK's absolute R&D spend closer to PFE's (MP) ~$6.5B but still be in line with several of its diversified competitors' spend at ~14% of sales."

Last year Merck spent $8.16 billion on R&D, the third highest in the industry. But it has precious little to show for it. A series of setbacks includes the FDA's decision to snip Merck's wings on suvorexant, a new sleep drug, demanding that it revise its NDA to limit any use to small doses. It's been hit with a big delay on its osteoporosis drug odanacatib. The embarrassing recent failure of Tredaptive, marketed in Europe, just made matters worse. Then there's the growing competition for Merck's mainstays, adding to the impression that fresh failures will undercut the company's performance at a critical time.

The influential Fernandez in particular was harshly critical of Peter Kim's record as R&D chief at Merck, though Kim left behind a promising immunotherapy, lambrolizumab, in development. And now he expects more changes from management. Without some surprising hits from R&D, this kind of heat could build into a potential firestorm for Merck.

Special Report: Merck - Biopharma's Top R&D Spenders - 2012

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