Strategy: Merck vs. Pfizer

 |  Includes: MRK, PFE
by: Derek Lowe

Here's an interesting contrast after all the Pfizer (NYSE:PFE) discussion here over the last few days. Merck's (NYSE:MRK) CEO, Ken Frazier, has actually pulled the firm's earnings-per-share guidance, saying that the recent trouble with vorapaxar and regulatory concerns in general make it impossible to say for certain what EPS growth will be. He also says that he'd rather have a freer hand to pay for both sales and research, in the interest of long-term growth.

Not everyone's buying it:

Analysts on Merck’s conference call were skeptical about the reasoning behind the guidance change. Catherine Arnold of Credit Suisse, who called the change “befuddling” in her note to investors, told Frazier that investors expected Merck to “share the pain” of shareholders and noted that vorapaxar, launching in 2012, should have been a “drag on earnings, not a positive.” Frazier replied that Merck’s cost-cutting efforts were ahead of schedule, but that he was faced with a decision to either withdraw guidance or commit to cutting projects that could make money in the future. He also argued that because Merck’s sales reps already visit cardiologists to sell heart drugs, selling vorapaxar, too, would not cost much more.

Well, if he's sincere in this, I have to salute the guy. I don't think that the Schering-Plough (OTC:BYERF) merger was a good thing, and Merck has certainly laid off people and disrupted a lot of things because of it. But if they're not going to pull a Pfizer - which I will define for now as "Keep cutting to make the numbers, and when you can't do that any more, then go out and buy someone else who has things to sell and then cut them" - then good for Merck. This topic came up explicitly during the earnings conference call:

Jami Rubin - Goldman Sachs Group Inc.: More of a strategic question. Just given the setback that you've faced with vorapaxar, I'm just wondering if you can provide us with your view of the research model going forward? I mean, might it make sense for some of these the very large, very expensive, very risky outcomes trial such as vorapaxar, how do you buffer these trials? I mean, might it have made sense to isolate some of these subgroups before pursuing a large trial, and I know that it's obviously what's happening with anacetrapib. Maybe if you could talk just in terms of how you see the R&D spend going forward. Also, it's interesting that yesterday or the day before Pfizer announced a significant cut to its R&D. And I'm just wondering if you can talk about your R&D spend going forward, and if you see opportunities to really rethink that budget and to improve the R&D output ...

Kenneth Frazier You asked some very typical questions in that set of questions. Let me start with vorapaxar. So I assume that what you're essentially asking is in hindsight, could we have done two separate trials. One in the ACF population, one with essentially the prevention population. I can't comment on the trial design. It was so long ago, but what I can say is that as we, as a committee with Peter and Adam and Peter Kellogg and myself, what we do regularly in the company is try to assess all the programs that we're relying on. We try to look at them from a science and technical and medical standpoint. We also try to look at them from a commercial standpoint. So we try to engage each program one by one, in addition to having the kinds of tough metrics we have in place around ROI and value creation in the pipeline. What I would also say is that we recognize that our strategy comes with it a certain amount of complexity, lengthiness and unpredictability because we are seeking innovative medically important therapies. And with vorapaxar, we know the risk of trying new mechanisms and approaches. I still continue to have optimism because the DSMB continued in 2P, we will see what the data shows. If the data shows a benefit to that population, this could still be a very important drug going forward.

On the Pfizer question, obviously, I can't comment on anyone else's view of their particular pipeline or the investment requirements that they face at this time. But I will tell you that we are mindful of the need to drive productivity, greater productivity in our R&D program. Peter Kim and his colleagues understands that we are focused on it. We are trying to take cost out. We're trying to increase the probability of success as we go forward. But as a company, I think we are saying that we are committed to innovation as a strategy, and we believe that over the long term it will pay off. And if you'll indulge me one minute, last week I attended the funeral of John Horan, who was the CEO of Merck a number of years ago before Roy Vagelos. One of the things he was proud us of was that he kept the focus on research during a fallow period for Merck Research in the 70s, and that's exactly what led to a state of innovation that has made the modern-day Merck. So I am not blind to what investors want us to do. They want us to invest in prudent ways and ways that actually drive ROI and productivity. But we, as a company, believe that the only sustainable strategy in the health care environment that we're in is real innovation that makes the difference to patients and payers ...

As I said above, I can disagree with some of the ways that Merck is trying to run its R&D business, not that they're asking for advice from me. But it at least appears as if their heart - and their head - might be in the right place. Or they at least want to make it appear as if they're in the right place. And that they're willing to tick off some Wall St. analysts in order to be seen to be doing that. Which should count for something - you'd think.