Merck & Co. (MRK) said Tuesday morning that it is embarking on a multi-year initiative to cut costs and “sharpen its commercial and research and development focus” to bolster its pipeline and return on investment while creating a more agile operating model.
The plan is expected to allow Whitehouse Station, New Jersey-based Merck, the second biggest U.S. drugmaker by sales, to save about $1.0 billion by then end of 2014 and $2.5 billion annually by then end of 2015, as compared to 2012 expense levels. Most of the savings are anticipated to come from cuts in marketing, administrative and R&D. Merck intends to eliminate 8,500 jobs in addition to the 7,500 jobs cuts that it previously announced, meaning that its workforce will be slashed by about 20 percent to 81,000 employees.
Total pre-tax costs for the new restructuring program are estimated to range between $2.5 billion and $3.0 billion. Merck thinks that two-thirds of these costs will result in cash outlays, primarily related to separation expense, and approximately one-third are non-cash, primarily related to accelerated depreciation of facilities to be closed or divested.
“These actions will make Merck a more competitive company, better positioned to drive innovation and to more effectively commercialize medicines and vaccines for the people who need them,” said Kenneth C. Frazier, chairman and chief executive at Merck.
The plan is part of a new strategy backed by Merck chief research scientist Roger Perlmutter. Perlmutter, the former vice president of R&D at Amgen (AMGN) , was appointed to the Merck job in April to replace R&D chief Peter Kim after several drugs in development, including an osteoporosis drug, a sarcoma drug and cholesterol drug, were underperforming in testing or failed to garner FDA approval. Kim retired in August after the company spent $50 billion in R&D to bring only seven drugs to market in his decade at the helm, although one of those drugs was the blockbuster diabetes drug Januvia, which generated about $4 billion in sales in 2012.
Merck said that several objectives can be met with overhauling its spending, including focusing on high-growth opportunities, investing in acquisitions of innovative opportunities to grow its pipeline and stock repurchase plans and dividends to return value to shareholders.
The company has also prioritized its developmental drug efforts to discontinue or out-license select late-stage compounds and focus on its anti-PD-1 immunotherapy program in oncology, BACE for Alzheimer’s disease (MK-8931), its next generation HCV program and V503, the company’s 9-valent HPV vaccine.
Merck also reiterated its full-year 2013 adjusted profits in the range of $3.45 to $3.55 per share.
Shares of MRK closed down 18 cents on Monday at $47.61, but are trading ahead by about 3 percent in pre-market activity Tuesday at $49. So far in 2013, shares are up about 20 percent.
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