Merck's restructuring program is shifting selling and marketing resources away from physician detailing towards payer and patient promotion, CEO Richard Clark indicated during the firm's annual business review in Whitehouse Station, N.J.

Clark presented a slide comparing the firm's current marketing spend mix to the planned 2010 mix. Spend for marketing to payers would double over the period, while spend for physician detailing and promotion would be cut in half. Consumer marketing would increase slightly.

"We will devote more resources on informing payers and consumers, both of which are becoming more and more involved in prescription choice," Clark said during the Dec. 15 presentation.

"We will also make certain that we are providing patients and payers alike with the information they need to make informed choices," he added.

In discussing the new payer marketing efforts, Clark highlighted his experience at the pharmaceutical benefit manager Medco. Clark served as CEO of Medco from 2000 to 2003; he succeeded Ray Gilmartin as CEO of Merck in May (¹ Also see "Merck Taps Clark As CEO In Nod To Medco Heritage; Gilmartin To Retire" - Pink Sheet, 9 May, 2005., p. 14).

"I know how important it is to respond to the needs of payers," he said. "My seven years at Medco gave me a unique window into the many methods drug benefit plans use to save costs."

The increased attention to payer detailing may reflect changes in the pharmaceutical marketplace accompanying Medicare Part D. When the prescription drug benefit takes effect Jan. 1, 2006, a significant portion of U.S. drug spend will shift to private prescription drug plans.

Merck would not be the first big pharma company to restructure its selling and marketing programs around the Medicare drug benefit; Pfizer has realigned its sales force to reflect the Part D regions (² Also see "Lipitor Is Medicare Rx Marketing Tool For Drug Plans, Pfizer Says" - Pink Sheet, 25 July, 2005., p. 20).

The sales and marketing changes are part of the second phase of Merck's restructuring program, which Clark outlined during the business review.

"Our commercial model will be leaner, more nimble, more information- and value-driven and much more cost-effective," he told investors.

While Merck will be increasing physician and patient marketing spend, the company plans to reduce overall promotional spending per brand by 15% to 20% over the next five years, Clark said. The savings would primarily come from the cuts in physician marketing.

At the same time, Merck plans to increase the productivity of its physician sales force by taking advantage of new technologies that will enable more targeted, cost-effective communications.

"We will be driving productivity by redeploying our sales reps by using new tools to help them do their jobs more effectively," he said. "The physicians they serve will get greater value from the time they spend with our representatives."

Merck has already cut its sales ranks by 50% compared to historic levels, and several pilot programs underway are showing positive results, the chief exec added.

For example, a U.S. sales force productivity initiative to increase both the number of days sales reps spend in the field and the number of calls placed per day has resulted in a 9% increase in calls. In addition, video and internet detailing initiatives have resulted in a three-fold increase in physician interaction time at less cost, Clark reported.

Merck will redeploy 1,500 sales reps from existing products to support the launch of its new vaccines business.

The company submitted a BLA to FDA for its human papillomavirus vaccine Gardasil Dec. 1, seeking a priority review (³ Also see "Merck Takes A Shot At A June Approval For HPV Vaccine Gardasil" - Pink Sheet, 5 December, 2005.). The company also has pending rotavirus ( RotaTeq ) and herpes zoster ( Zostavax ) vaccines which just received FDA advisory committee review.

The sales and marketing restructuring comes in the face of tight times for Merck; the company is facing thousands of lawsuits related to the withdrawal of the arthritis medication Vioxx and the prospect of a number of key patent expirations - including the company's largest product, the cholesterol therapy Zocor - in upcoming years.

Clark said the company recognizes "that while we were once the envy of the industry, that's not the case today."

"We understand that to regain our leadership position, we have to change," he said. "Not change at the margins, but major, far-reaching change."

The selling and marketing restructuring is part of Merck's long-term growth strategy - titled the Plan for Winning - aimed at returning the troubled drug maker to earnings growth by 2007.

The marketing restructuring and cost-cutting program comes on top of a manufacturing and supply chain program announced less than a month ago (⁴ Also see "Merck Takes Cost-Cutting Therapy, But What Will The Side Effects Be?" - Pink Sheet, 5 December, 2005., p. 3).

The first phase of the initiative, which included a 7,000-person head count reduction and facility closings, is expected to yield cumulative pretax savings of $3.5 bil. to $4 bil. between 2006 and 2010.

In the second phase, Merck expects to achieve an additional $1 bil. in savings, mostly from the reductions in marketing and administrative expenses, CFO Judy Lewent said. The total cumulative marketing and administration savings, including components from both phases of the restructuring, will be $1.9 bil. to $2.2 bil. through 2010.

"Our new selling model, streamlining of our sales administration and a company-wide business process redesign, will be key contributors to these savings," Lewent stated. The additional cost-cutting measures will bring the total anticipated cumulative savings by Merck to $4.5 bil. to $5 bil. from 2006 to 2010.

The cost-saving will be realized on an incremental basis throughout the life of the program, Clark said. "It's just not the flipping of the switch and they appear in 2008 and beyond. It's a nice improvement year-over-year," he said.

Clark said the savings from the manufacturing restructuring will be spread across the first three years of the program, as the company closes five facilities. "It takes time to register a product transfer so that will be a period of time," he explained.

The remaining cost savings "are starting now," he said. "We are going to try to do as much of that as possible through Dec. 16 and then start it again next year" with the additional $1 bil. program, he said.

The company expects the cost-cutting program - along with revenue from new products such as Gardasil - to return the company to a double-digit compound annual growth rate by 2010.

"These projections are not based on optimistic scenarios," Clark maintained. "They are based on conditions as they currently exist, as well as anticipated changes in the environment."

Clark emphasized that the company is committed to realizing the program's goals, noting that employee compensation will depend on meeting established program metrics.

"The literature tells you that 30% of companies don't really achieve the realization of a plan, and when you study that and you find out why that exists, it is because they really haven't spent enough time planning it and executing it, putting the right resources in place, having the discipline around it, putting the right benchmarks in place" he said.

"We're going from a company standpoint to a balanced scorecard, where we are going to have metrics around this plan which [are] going to have an impact on the compensations and bonuses and rewards that are given in the company."

Clark pledged to revisit the program in the future to gauge the company's adherence to the initiative.

"As we go through '06 and '07, we'll bring you back to this presentation," Clark told investors. "Those metrics that I showed, we'll show you the successes or the failures of how we are doing against that."

"We are confident in what we are talking about, based on the fact that we have teams working on it, we have models in place, we have capabilities," Clark declared.

The goals "we're talking about and how we're going to get there is not a two page document - it's pretty intensive and we'll give you the information you need to show that we have credibility behind what we are talking about," he added.

Merck Sales Restructuring Sacrifices Physician Detailing To Payer Marketing

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