Merck & Co. Inc.beginsa restructuring expected to eliminate 8,500 positions and generate savings of $2.5 billion by 2015 with no immediate plans to divest its consumer health business, which recently launched a first-in-class OTC switch, Oxytrol for Women overactive bladder patch.

CEO Kenneth Frazier on Oct. 1 said Merck continues to evaluate consumer health and its animal health business, but reaffirmed Merck’s commitment to the businesses for now.

“We’re evaluating all of our businesses, including animal health and consumer care,” Frazier said in a conference call with analysts. “We continue to see that these markets have favorable macro trends and are complementary to our pharmaceutical business.”

However, the CEO said if the consumer and animal health businesses are viewed someday as being more productive outside Merck, the firm would consider alternatives.

“As I sit here today, I view them as being important contributors to Merck. That doesn’t mean that as we move down the line and as we continue to evaluate what our options are that we might not find scenarios where we might reach another conclusion, that something could be more productive outside Merck,” he added.

Consumer Care generated sales of $1.06 billion in the first six months of the year, down 4% from the first half of 2012. In addition to Oxytrol for Women (oxybutynin 3.9 mg), which reached retail shelves in September, the division markets the Claritin allergy, Miralax constipation treatment, Coppertone sunscreen and Dr. Scholl's foot care lines Also see "In Brief: Furness in new CDER role; Oxytrol for Women at retail; advisories on drug-tainted sex enhancers; senators want energy drink restrictions" - Pink Sheet, 30 September, 2013..

Merck added most of its consumer health business in its 2009 acquisition of Schering-Plough, and soon after appointed former Johnson & Johnson executive Bridgette Heller to steer the division toward global expansion Also see "Merck Appoints Consumer Head To Help Division Expand Globally" - Pink Sheet, 22 February, 2010..

Some Merck competitors undertook similar restructurings aimed at cutting costs and more narrowly focusing research and development and successfully spun-out non-pharma assets into new businesses well-received by investors.

Pfizer Inc. spun out its animal health business into a company called Zoetis in February 2013, getting a higher stock price than anticipated in an offering that brought in $2.2 billion. In 2009, Bristol-Myers Squibb Co. spun out its infant formula business into Mead Johnson Nutrition Co. (Also see "Pfizer’s Wyeth Buy Rebuilds OTC Switch Potential" - Pink Sheet, 2 February, 2009. and Also see "BMS Spins Off Mead Johnson In IPO, Retaining Majority Control" - Pink Sheet, 28 April, 2008.).

Some Wall Street analysts believe non-pharma businesses are more productive when broken out from their big parents and allowed to run as smaller, nimbler operations Also see "Consumer Division Divestments Would Spotlight Firms’ Value – Analysts" - Pink Sheet, 6 June, 2011..

While consumer care and animal health are staying inside Merck, the firm announced it will close its Summit, N.J. facilities, which house animal health R&D. The company will move its global headquarters to facilities in Kenilworth, N.J., in a transition expected to begin next year and be completed by 2015.

The company announced plans in 2012 to close its Whitehouse Station campus, where its headquarters currently are based, and relocate to Summit. However, after re-evaluating its real estate needs, Merck decided it could achieve greater cost savings by closing both its Summit campus and Whitehouse Station facility.

Still, Frazier said the decision to close the Summit location does not mean the company will no longer conduct animal health research.

Restructuring Focused On Recharging Pharma R&D

Merck’s pharma business is the focus of the restructuring aimed at reducing costs amid slowing sales and late-stage pipeline setbacks.

“The actions … are not driven by any single, immediate issue, but rather our proactive response to the challenges we’ve seen both externally and what we expect to face in the coming years,” Frazier said. “Slowing growth in key markets, combined with research disappointments and regulatory delays, requires us to change how we’re going to move forward with the right plan to drive growth.”

The drastic cost-cutting will not come as a surprise to investors and industry watchers, who have tracked Merck’s sliding sales. Its top line has come under pressure from the loss of its second-best-selling drug Singulair (montelukast)to generic competition in 2012 and from slowing sales of the diabetes drug Januvia (sitagliptin). Merck’s sales declined 10% to $21.68 billion in the first six months of 2013.

Against that backdrop, its pipeline has failed to deliver. Setback has followed setback at Merck since the firm announced in December it would halt development of the HDL-cholesterol raising drug Tredaptive (laropiprant) after a 25,000-patient Phase III outcomes trial failed to meet its primary endpoint ([A#14121220003]). The drug, already approved in Europe, was pulled from the market there.

Then, in February, Merck said it would delay until 2014 filing a new drug application for the phase III osteoporosis drug odanacatib to review a safety signal. And other setbacks have followed: the late-stage failure of the Parkinson’s drug preladenant in May and a “complete response” letter for the anesthesia-reversal injection suvorexant in July Also see "FDA Needs More Time To Review Sugammadex Inspection Report, Cancels Advisory Committee" - Pink Sheet, 17 July, 2013..

Acknowledging its R&D troubles, Merck appointed a new R&D head in March, Roger Perlmutter, formerly of Amgen Inc., to succeed long-time Merck Research Laboratories President Peter Kim ([A#00130311007]). Perlmutter has spent the last few months reprioritizing Merck’s pipeline and evaluating ways to reduce R&D spending. The company spent $8.17 billion on R&D in 2012.

“Roger has already taken action to reduce layers and improve efficiencies within our research organization,” Frazier said.

“We will focus on programs most capable of providing unambiguous promotable advantages to patients and payers,” he added. The company’s research focus will be in four areas: vaccines, oncology, diabetes and acute care. Still, Frazier said the company will continue to support promising drugs in other therapeutic areas as well.

The company emphasized the anti-PD-1 immunotherapy lambrolizumab as one of its most valuable pipeline assets, along with the BACE inhibitor MK-8931 for Alzheimer’s disease, next-generation drugs for hepatitis C, and V503, a 9-valent vaccine for HPV infection.

Of the $2.5 billion in annual net cost savings the company expects to achieve by 2015, $1 billion of the savings will be realized by the end of 2014. The substantial majority of the savings will come from marketing and administrative expenses and R&D. The latest workforce reductions will come on top of previously announced reductions of 7,500 employees, resulting in a 20% decrease to Merck’s workforce, which includes about 81,000 employees. The company expects the new program will cost about $2.5 billion to $3 billion, of which it will record $900 million to $1.1 billion in 2013.

Merck reconfirmed its full-year 2013 non-GAAP earnings per share target range of $3.45 to $3.55, but declined to provide longer-term financial guidance.

Merck Reaffirms Commitment To Consumer Care In Restructuring

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