#6 - Merck & Co.
One Merck Dr. / P.O. Box 100
Whitehouse Station, NJ 08889-0100
Tel: (908) 423-1000
Fax: (908) 735-1253
|2009 Top Selling Drugs|
Account for 77% of total pharma sales, down from 78% in 2008.
* 2009 Pharma revenues include $1.7 billion in Zetia and Vytorin sales. Prior to the merger, this derived from a joint venture with Schering-Plough and is not officially counted as drug revenues by Merck. I have reported half of Vytorin/Zetia pre-merger sales as Merck revenues to give a clearer idea of Merck’s pharma performance.
It’s a brand-new Merck! On November 3, 2009, the $41 billion merger of Merck and Schering-Plough was completed, creating a new behemoth. As with the Pfizer/Wyeth tie-up, only SP’s post-merger revenues are counted toward Merck’s numbers in 2009. With projected annual revenues around $46 billion, Merck could be neck-and-neck with Sanofi-Aventis by the end of 2010, depending on exchange rates.
Those companies are competing for the #2 slot in our rankings, but they’re also collaborating in another field: animal health. Sanofi-Aventis exercised its option to combine Merial with Intervet/Schering-Plough in a joint venture. This follows Sanofi’s purchase of Merial from Merck for $4 billion in September 2009, the sale of which was a condition for the Merck/SP merger. The transaction, expected to close in 1Q11, will result in a new #1 in animal health, passing Pfizer’s division.
The Lowe Down
All of 2010 for Merck looks to be devoted to digesting Schering-Plough. It doesn’t seem like a very enjoyable process from outside, that’s for sure. All I’ve heard about for months is fear and uncertainty as rumors sweep around about which sites are closing (or not), which therapeutic areas are being abandoned (or not), and who will end up working at (and running) what’s left. And this is from way outside the company, mind you – inside the place it must be a madhouse.
This is one of the costs that the business folks forget to add in when they’re running the numbers on a merger: can anyone imagine that Merck has been as productive as it should have been during the last year? Half as productive? And how long will it take for things to get back to what passes for normal around the industry these days?
And what’s normal at Merck, anyway? The company’s culture has undergone some huge shifts, at least from an outsider’s perspective. The days that its people held themselves a bit aloof – after all, they worked for Merck – are long gone. What have they been replaced with, exactly? —Derek Lowe
In addition to animal health, the new Merck is pursuing several of the same growth strategies as its competitors: vaccines, branded generics, consumer products, and emerging markets. Merck’s rationale is pretty similar to the others’: Fosamax went generic in 2008 and dropped from $3 billion in 2007 sales to $1.1 billion in 2009. Cozaar and Hyzaar, which combined for $3.5 billion in sales, face generic competition this year, while top-seller Singulair will be under attack in the U.S. in 2012. Other non-blockbusters — Maxalt (2012), Cancidas (2013) — are also near the end of their patent life.
Some of those losses are being offset by strong growth by Januvia/Janumet, Isentress and Remicade (they hope), but many of Merck’s top sellers are either in decline or just near their peak. The company is pushing into emerging markets for growth; it estimates that those markets will comprise 25% of pharma and vaccine revenues by 2013.
As part of its transformation, Merck has been rolling out its New Commercial Model (first mentioned in 2005, I believe, which means “new” is getting a little old) in multiple markets. The company reports that this customer-centric system has boosted Singulair’s results by 14% in the UK while promotional support for the drug was cut by 40%. One of the developers of this model, Kenneth C. Frazier, was named president of the company in April 2010.
In addition to revenue-growing plans, Merck has also been engaged in cost-cutting restructurings for years, and it’s going through another round with the SP acquisition. This time, the company plans to cut 15% of its total workforce, which comes out to 15,000 employees, while also letting 2,500 vacant positions remain unfilled. The moves are intended to save $2.6 to $3.0 billion in annual costs, but will cost somewhere between $2.6 and $3.3 billion to implement. In its annual report filing with the SEC, Merck repeatedly refers to this as the “first phase” of the restructuring: “The Company expects that additional savings will be generated by subsequent phases of the Merger Restructuring Program that will be announced later this year .” The company shed 5,000 jobs between the end of 2009 and the end of 1Q10.
Target: Avecia Biologics
Price: not disclosed
Announced: December 2009
What they said: “This transaction follows an initial strategic development and supply relationship with Avecia Biologics and will provide us with an operational facility staffed by an experienced workforce that is highly skilled in a broad portfolio of bioprocess systems.” —John T. McCubbins, senior vice president, Biologics and Therapeutic Protein Operations, Merck Manufacturing Division
There’s a bigger question about post-merger Merck than “Who’ll be left standing?” That Big Unresolved is: What happens to Remicade and Simponi? Those RA MAbs were distributed by SP and Johnson & Johnson under a 1998 agreement with Centocor. J&J asserts that the merger triggered a “change of control” clause that allows it to terminate the deal and take over 100% of the sales. While the merger was constructed so as to legally make SP the buyer, J&J argues that the move constitutes a Merck takeover, and is taking the case to arbitration.
It sounds like a “letter of the law vs. spirit of the law” game, with huge risks; Remicade posted more than $6.6 billion in 2009 revenues, with $2.3 billion coming from Schering-Plough and Merck. (Remicade posted $674 million in 1Q10 sales for Merck.) If Merck loses the case in front of the panel, the value of the merger drops significantly. Merck can also be held liable for damages, but that’s small potatoes compared to losing future Remicade and Simponi sales. Barring a settlement between the parties, the case will be heard in September 2010.
The SP acquisition wasn’t just about Remicade, of course. It also helped boost Merck’s pipeline, bringing in late-stage (or delayed) drugs like Saphris (schizophrenia/bipolar disorder) and Bridion (reversal of surgery-related muscle relaxants). In a May 2010 pipeline report, the company noted that 55% of its Phase III pipeline was from the Merck side, and 45% came in with SP. In all, the company has four NDAs under review, with plans for several more filings in major markets in 2010, including combo products.
Merck is pretty tight-lipped about its contract manufacturing efforts, although it did point out in its annual SEC filing that its manufacturing division will “further focus its capabilities on core products and outsource non-core manufacturing.”
To that end, Patheon, a Mississauga-based CDMO, put out the news in June 2010 that it has expanded its contract manufacturing agreement with Merck. Under the agreement, “Patheon serves as a key preferred supplier to Merck for projects and services delivered from eight of Patheon’s global facilities,” according to a Patheon statement.
In the same announcement, the company noted that it has five novel biologics in development and, more interestingly, a pair of biosimilars (not including its PEGylated erythropoietin, which was discontinued). The company “anticipates access to an accelerated development pathway for biosimilar candidates that employ the same biologic expression platform used for manufacturing the originator molecule,” according to the report. In December 2009, Merck licensed the Pfenex Expression Technology for a vaccine candidate in a deal worth $52 million in upfront and milestone payments, as well as royalties.
So where’s Merck headed? They blew up in scale with this acquisition, buying themselves time to deal with some gnarly patent expirations. However, one of the the new realities of deals like this is that, just as the pipeline swells with new products, R&D budgets get cut as part of cost synergies. Merck has begun an out-licensing program, according to reports from an Elsevier conference, to deal with assets it doesn’t have the Resources to develop.
The company has positioned itself to grow geographically, to generate cash with consumer products, and to push into wild blue yonder of biosimilars. While some of those moves help reduce the reliance on R&D, they don’t eliminate it entirely. It’s pretty clear that a few significant regulatory delays or a bad ruling in the J&J case could leave Merck struggling to hold onto its place near the top of our charts.
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