Merck spotlights new deals, R&D review as demands to rebuild pipeline grow

Merck CEO Kenneth Frazier

Merck ($MRK) managed to disappoint just about everyone this morning, cutting its full-year earnings expectations as generics eat up the Singulair franchise and sales of its top-selling blockbuster Januvia slipped significantly. Even an added $15 billion stock buyback announcement and claims about transitory inventory issues couldn't shift analysts' attention from an increasingly urgent question: What can Merck do to reverse the company's woeful record in R&D?

The most immediate answer is a commitment to doing deals to beef up the pipeline, as new R&D chief Roger Perlmutter wraps a three to 6-month assessment of a research division which consistently consumes more than $8 billion a year. And the pharma giant is promising to accelerate development of an experimental cancer therapy, the mid-stage PD-1 drug dubbed MK-3475 that recently won "breakthrough" status at the FDA.

Some analysts say that Merck is the only Big Pharma company to yet pull off a major R&D restructuring--raising the possibility that Perlmutter's initial task may involve some complicated organizational surgery.

"The share re-po is now the SECOND "bone" that mgmt has thrown to the angry shareholder mob," noted ISI's Mark Schoenebaum. "The first being the naming of a new head of R&D and the retirement of the long-time, but not well loved, former head of R&D. Recall that MRK is the only company in US pharma to not take "massive" action (e.g. R&D cuts & divestitures) in the face of declining R&D productivity. Also bear in mind that MRK has chosen to do this BEFORE the FDA issues a decision on the ongoing incretin (Januvia) safety investigation."

Roger Perlmutter

In a Q&A with analysts this morning, CEO Ken Frazier noted that Perlmutter has been tasked with three key objectives: "Look at the organization and make the kind of assessment necessary to enhance the longer-term capability of MRL (Merck Research Laboratories); look at various programs underway" to ensure that capital is spent productively; and "continue looking for the best opportunities both inside and outside so we have a flow of products in the pipeline to drive our continued success."

Perlmutter quickly added that it wouldn't surprise anyone that "you bring in the new guy and a fresh pair of eyes and there are going to be some changes." 

Exactly what those changes are, though, won't be decided until he completes his evaluation of R&D. In the meantime, he added, he's already spotted some opportunities for the company to accelerate work on key programs and improve productivity.

Whatever Perlmutter and Frazier decide to do, today's call with analysts left no doubt that rebuilding the company's pipeline has emerged as one of Merck's biggest challenges.

Merck hasn't been idle on the partnering front. Execs today highlighted their deal with Samsung on biosimilars, which followed its own failure on that front, as well as the recent deal to partner on Pfizer's SGLT2 diabetes drug program, offering a possible combo approach with Januvia. But those pacts have only whetted Wall Street's appetite for more deals. And Merck will have to do a better job about opening up on the details of its pacts if it plans to make its case stick with analysts.

- here's the press release on Q1

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