Friday, January 7, 2011

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.


Anonymous said...

Still nothing on them shutting down the Kenilworth site? Except for one building. Alot of people losing their jobs there.

Anonymous said...

Happy New Year Kenilworth! Love Ken F.

Anonymous said...

What no update re:Boce filing?

condor said...

Dear Anon. --

The supposed "boceprevir news" -- isn't.

Vertex filed -- on a rolling basis -- with FDA back on November 23, 2010 -- and had been granted an acclerated review. The Vertex CEO said so, at the time.

I suspect that we will hear an update from Vertex, on the telaprevir FDA filing, before the end of January -- and I'll update then.

I chose not to take a pot-shot at Merck for hyping this filing (even though I predicted it wouldn't be made until January 2011), until we know for certain whether Merck -- or Vertex -- is ahead, in the FDA filing/approval race.

I do still strongly suspect that Vertex is well-ahead -- by about a month, as I indicated, here -- back on November 23, 2010.

Namaste, and do stop back -- one and all.


PS: The official Merck-i-fied word (still) as to Kenilworth is that it will not be closed, but will be a satellite HQ.

We'll see -- I doubt it, but yes, there's been no official word on closing it, yet.

Anonymous said...

I agree and understand for the Boce story. Though, I wonder is it more of the investment houses pumping the news than it is Merck?

condor said...

See two posts, above -- news on all fronts!


Anonymous said...

Frazier also indicated that Remicade arbitration could be resolved soon. Seemed to imply a settlement could occur.

Sounds like Ken doesn't want to invest money in expanding consumer business globally. You think he could partner with Sanofi again? Any other suitors for this business???