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NEW YORK (FORTUNE) -
With all the headlines focused on Merck's Vioxx litigation, it's easy to forget that the company faces big challenges in the business of actual drug making, with some of its biggest selling drugs facing patent expiry.
Next month, at a December 15th analyst meeting in New York, Merck's new CEO, Richard Clark plans to unveil his closely-held strategy for reviving the world's fifth-largest pharmaceutical firm. Clark won't discuss the plan, which he calls "the Road Map," but insiders say it will steer Merck over some rough and unfamiliar terrain.
Clark's plan will involve a severe round of cost-cutting by way of restructuring and layoffs, especially in the areas of sales, marketing and research, according to sources who requested they not be named. Clark, Merck's newly-appointed man in charge, hinted in recent discussions with investors that the company needs to completely rethink how it sells its wares to doctors.
Perhaps the most austere portion of Clark's plan will entail reining in research costs and cutting unproductive programs. Indeed, he told investors last June that Merck "will be focusing on prioritizing therapeutic areas that provide the best prospects for success." What that means is that, for the first time in company's history, Clark is expected to severely narrow the scope of Merck's research and development, perhaps discontinuing areas of research wherein Merck holds fewer patented chemical compounds such as psychiatric diseases, obesity and sleep disorders. Merck declined official comment on Clark's work-in-progress.
There's reassuring news, however, for shareholders who continue to stick with the company in the post-Vioxx era. Clark is adamant about preserving the company's roughly 5 percent dividend yield, the most generous in the U.S. drug sector. Investors who've remained loyal to Merck have done so largely because of the company's $3.3 billion annual dividend payout.
"Our dividend remains secure," Clark told analysts in a conference call in late October. "We are fully committed to maintaining it at the current level and we have the financial strength to support it while continuing to invest in our business priorities."
Clark's plan won't be easy to implement. Simultaneously restructuring a sales force while introducing new products is a risky proposition. So too is the process of firing researchers while demanding more productivity out of remaining scientists. And then, of course, there are the courts, where the company has some 7,000 more Vioxx lawsuits left to fight.
Clark is squarely focused on Merck's problems. Since taking over for retiring chief Ray Gilmartin in May, Clark has been attempting to restore both the company's morale and ensure that Merck can navigate a clear course ahead, as some of its best-selling medicines lose their patent protection.
In addition to holding frequent town hall meetings and lunching in the cafeteria with the rank and file at the company's Whitehouse Station, N.J. headquarters, Clark has embarked on a top-to-bottom review of the company's finances.
Next June, the company's biggest blockbuster, cholesterol medicine Zocor, will begin to face generic competition, virtually erasing the drug's $5.2 billion in annual sales. And in 2008, Merck's $3.2 billion osteoporosis treatment, Fosamax will endure a similar fate. In all, roughly half of Merck's projected 2005 revenues of $22 billion will be exposed to generic competition over the next five years.
There's little in Merck's pipeline of future products to make up for the losses. The company's predicament isn't unique. Competitors like Pfizer are also experiencing research droughts. What makes Merck's situation worse, however, is that the company was forced to discontinue research on a handful of promising drugs after a series of mid and late-stage research disappointments in 2003.
To be sure, Merck has a host of scientifically impressive medicines slated for release over the next half-decade. Next month, for instance, the company plans to submit for FDA approval, Gardasil, a vaccine shown to prevent cervical cancer. The FDA is already reviewing two other Merck vaccines, one for treating Rotavirus and another for shingles. Trouble is, the three vaccines combined are only expected to generate sales of about $1.8 billion by 2010.
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