CEO Rob Davis referred to the cost reduction program as a ‘reallocation’ rather than a cut, with the savings to be reinvested to support up to 20 new product launches.
Merck will execute $3 billion in cost cuts to support the launches of more than 20 products nearing the market, the company announced Tuesday. The reductions will be spread across administrative, sales and R&D roles, plus a pruning of the pharma’s global footprint and manufacturing network. At the same time, investments in R&D will ramp up, with CEO Rob Davis saying during an earnings call on Tuesday that the reductions are necessary to redirect funds toward new potential products.
The restructuring was approved this month, with an initial $649 million in charges already recorded for the second quarter. The savings will break down to $1.7 billion annually, with the $3 billion target realized by the end of 2027.
“As we sit here today and look at really the impressive opportunity we have with these 20-plus launches, we will and we need to fully fund behind those launches,” Davis said. That includes supporting Phase III trials and commercialization preparations. “But we want to do it productively and efficiently, and that’s why we’re looking to reallocate … resources from the slower growth areas of the business to fully fund into the fast-growing areas of our business.”
That’s why, according to Davis, the program is more of a reallocation than a cut. As billions are reduced from the spreadsheet, Merck will be simultaneously growing spending and making new hires in the areas that need them, reinvesting the $3 billion.
Davis assured analysts that Merck’s famed oncology program—which is anchored by Keytruda—will remain a priority. He explained that with Keytruda’s patent protection period winding down, Merck is committed to remaining a leader in immune-oncology and the company is fully throwing its weight behind bulking up other products to fill in. That said, the company is also working toward clinical trials in remaining indications where Keytruda could be used and a subcutaneous version.
Gardasil Weighs Down Earnings Again
The “multiyear optimization program” comes as Merck reports a 2% decline in earnings to $15.8 billion compared to the same period last year. Earnings were once again dragged down by disappointing sales of the HPV vaccine Gardasil in China and Japan, which has been a multi-quarter headache for the New Jersey pharma. Sales of the shot declined a whopping 55% to $1.1 billion globally for the second quarter compared to the same period last year.
Merck’s earnings came in below analyst expectations, but the firms mostly shrugged off the decline, with Keytruda and Winrevair helping soften the blow. Guggenheim called the second quarter “mixed” for Merck, as the firm had expected earnings in the range of $15.928 billion and $15.899 billion.
Despite the decline and the reallocation of resources, Merck intends to continue hunting for M&A opportunities. Even with the $10 billion acquisition of U.K.-based Verona Pharma, Merck has the ability “to pursue additional science driven value enhancing transactions,” according to CFO Caroline Litchfield.
Dean Li, president of Merck’s Research Laboratories, did not elaborate much on whether Merck is looking to China for more assets, but said “we have a very high standard, whether it’s from China or from the U.S.”
Verona in particular was attractive to Merck because its lead asset, Ohtuvayre, was already approved in the U.S., Li explained. Assets they had looked at in China did not have a “first mover advantage.”
Li said the team has been following the biotech for “at least five years,” with growing interest in its dual inhibitor of PDE-3 and PDE-4.
“As we watched it, we had recognized that it could be the first novel mechanism,” Li said.
According to Li, the Verona deal is expected to close in the fourth quarter.
