Ken Frazier -- If He Walks The Talk -- Will Improve Merck

Two standout comments from yesterday's Goldman Sachs & Co. "Unplugged" sessions: (i) the earlier killing of marginal R&D efforts (potentially saving billions); and (ii) the potential spin- or sale of the legacy Schering-Plough Consumer Health businesses. The latter is a much smaller piece -- only $250 $290 million in annual revenue, and won't move the needle. However, I like the discipline it exhibits: shed assets that are underperforming. Note that this rhetoric also confirms that the Schering-Plough transaction always was a "bust-up"/yard sale play.

In any event, here is the bigger part -- part (i) -- as detailed by Bloomberg, overnight:

. . . .Merck, the second-biggest U.S. drugmaker, will halt development of less promising drugs more quickly, Frazier said today at a Goldman Sachs Group Inc. investor conference in New York. The Whitehouse Station, New Jersey-based company is changing compensation to scientists to prevent expensive late-stage development of weak commercial prospects, he said.

Merck is developing new drugs to replace revenue as it faces generic competition that began last year to blood-pressure pills, Cozaar and Hyzaar, with combined 2009 sales of $3.6 billion. . . .

“The only way you can sustain a business like this is through innovation; that doesn’t mean you can just throw money at things,” Frazier said. “Historically, our successes haven’t required us to think as tough about resource allocation.”

Merck hosts regular symposia where its finance experts teach scientists how to seek better return on invested capital, Frazier said. The three-year return is now tied to researchers’ compensation, he said. . . .

Now, the "huge if", here -- if he actually executes on this promise -- and kills projects after the first $100 million, rather than waiting for a late-stage "miracle" -- while spending nearly $800 million per project (over perhaps a dozen marginal projects), then Whitehouse Station's performance (and stock price) will materially improve -- perhaps even into the $40s. Time will tell. The part (ii), from Pete Loftus' keyboard, overnight:

. . . ."We will look at all the options," Kenneth Frazier, who became CEO on Jan. 1, told investors at a Goldman Sachs conference in New York Thursday.

"We have to look at it to see what role it can play longer term," he added. "Is there a plan for organic growth or a value-creating opportunity, either to build on it or to do something else to maximize shareholder value?"

Merck inherited the bulk of its consumer business with the 2009 acquisition of Schering-Plough for $49.6 billion. Merck's consumer-care unit, which sells Coppertone sunscreen and Dr. Scholl's foot powder, generates about 3% of total Merck sales.

Frazier said the consumer unit isn't "global enough" and requires investment to grow. He said he hasn't given himself a deadline for deciding on the division's future. He declined to say specifically whether the company was considering a spinoff, sale or some other transaction. . . .

Stay tuned -- but a good (rhetorical, at least) start on 2011 -- at Schmerck.