Merck Wins Round Two

Updated from 12:02 p.m. EST

Merck (MRK) outlined the second part of its restructuring plan Thursday, saying it would narrow its research and development efforts, reorganize its sales staff and achieve an additional $1 billion in savings through 2010.

"We have a lot of work to do to make Merck a leader again," said Chief Executive Richard Clark said as he addressed analysts and investors tuning in to the company's strategy meeting. "To regain our leadership position, we must change."

Those changes, he added, won't come at the margins of Merck's activities, either -- they represent comprehensively different ways in which the pharmaceuticals maker develops and markets drugs.

Merck also took the wraps off a couple of experimental cardiovascular drugs that "hold significant promise" in raising so-called good cholesterol and preventing heart disease. The company expects to submit applications to the Food and Drug Administration in 2007.

That same year, Merck plans to seek regulatory clearance for an insomnia drug, a diabetes treatment and an AIDS drug. Next year, it will ask for approval of another diabetes drug, a lymphoma drug and a treatment for chemotherapy-induced nausea and vomiting.

Merck's presentation got a better review from investors than did the restructuring plan laid out Nov. 28. That day, Merck talked about improvements in manufacturing and said it would cut 7,000 jobs, or 11% of its worldwide workforce, and its stock closed down 4.6%. By midafternoon Thursday, the stock was up 42 cents, or 1.4%, to $29.62 on above-average trading. The session high was $30.20.

Growth Renewal

Merck also reaffirmed its 2005 earnings guidance of $2.47 to $2.51 a share, excluding one-time items and previously announced restructuring charges. The consensus among analysts polled by Thomson First Call is a profit of $2.51. When calculated using generally accepted accounting principles, Merck anticipates earnings of $2.04 to $2.10 a share.

The company reiterated its 2006 earnings prediction of $2.28 to $2.36 a share, including roughly 7 cents of stock-option expenses but excluding the restructuring charges related to closing plants and reducing employment. Analysts are calling for $2.35. Merck anticipates GAAP-based earnings per share next year of $1.98 to $2.12.

The company's chief financial officer, Judy C. Lewent, provided the standard answer to the standard Wall Street question about the dividend. Merck is committed to keeping the dividend "at current levels," she said.

Lewent said Merck should achieve a compound annual growth rate of revenue of 4% to 6% from through 2010 thanks to its own products and an assortment of existing joint ventures. R&D spending should grow at low to mid-single digits on a compound annual basis during the same period.

By targeting another $1 billion in savings on top of those already announced, Merck said it expects to cut costs by $4.5 billion to $5 billion through 2010.

Lowering expenses should help Merck renew earnings growth in 2007 "and strengthen by the end of [2010], so that on a compound annual basis, earnings per share growth reaches double digits," the company said.

However, that prediction has several caveats, including the fact that the base year for calculating the growth rate is 2005. In addition, the growth forecast excludes restructuring costs, net tax charges, one-time gains from a partnership with AstraZeneca (AZN) and any reserves for potential Vioxx litigation liabilities.

Merck has set aside $675 million for defending the product in court, but it hasn't established a reserve for liability. Merck has one victory, one loss and one mistrial in the three Vioxx cases that have been tried. The company plans to appeal the case it lost, and it will retry the mistrial case "if necessary."

As of Nov. 30, Merck was a defendant in about 9,200 Vioxx lawsuits alleging that the drug caused personal injuries. The company has also been named in 188 class-action suits that contain allegations of personal injuries or economic losses. Vioxx, an arthritis drug, was pulled from the market last year amid concerns about its ties to heart-related problems

Research Proposal

Clark said the company will improve its research productivity by focusing on nine disease categories -- Alzheimer's disease, atherosclerosis, cardiovascular disease, diabetes, novel vaccines, obesity, oncology, pain and sleep disorders.

"These therapeutic areas were carefully chosen based on a set of criteria including unmet medical needs, scientific opportunity and commercial opportunity," he said.

However, Merck won't abandon all other research. Clark described 11 categories, including antibiotics, antivirals and asthma medications, in which the company would make "focused investments." In addition, Merck will pursue other treatments "by continuing to commercialize attractive clinical development candidates in the pipeline and by pursuing appropriate external licensing opportunities."

He noted that Merck has signed 190 licensing deals in the past five years. "Targeted acquisitions" are also a possibility, he said.

Clark said the company is instituting a "new commercial model that will deliver greater value to customers [and] enable Merck to sell products more efficiently and effectively." This approach will help the company cut spending per brand in the U.S. by 15% to 20% by 2010.

Merck already has cut the number of sales representatives promoting the same product by 50%. Several pilot programs have resulted in greater productivity (more sales calls per representative) and more time that representatives spent with individual physicians, the company said.

Merck also is redeploying 1,500 sales representatives who now promote major exisiting drugsto help launch new vaccines.

Product Prospects

The biggest development on the R&D front was Merck's revelation that it was working on a pair of cardiovascular drugs. One compound called MK-524A is an extended-release form of niacin that seeks to raise so-called good cholesterol while lowering triglycerides, a type of fat found in the blood.

The announcement was bad news for Kos Pharmaceuticals (KOSP), whose stock sank $15.31, or 21.9%, to $54.62. By early afternoon, 8.8 million Kos shares had been traded. The average daily volume for the last three months is 411,000 shares.

Kos markets Niaspan, an extended-release form of niacin, as well as Advicor, which combines extended-release niacin and a drug that lowers bad cholesterol.

Merck will begin a late-stage clinical trial this month, seeking to confirm MK-524A's effectiveness and safety. Merck executives presented early test data Thursday saying that MK-524A had fewer rash and itching side effects, known as "flushing," -- than Niaspan.

Merck also is working on MK-524B, which combines its experimental niacin with Zocor, its best-selling drug that reduces bad cholesterol. The company expects to start a final clinical trial during the first quarter of 2006 and file an application with the FDA in 2007.

The attempt to raise good cholesterol and lower bad cholesterol in the same pill pits Merck vs. Pfizer (PFE). Pfizer is investing $800 million in its combination pill that features Lipitor and the experimental torcetrapib.

Pfizer is heading into its final clinical testing. If the study is successful, analysts say the drug could reach the U.S. market in 2008.

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