Merck & Co. and Pfizer's CEOs are taking significantly different approaches in their planned future investment in research and development as both companies work to address an anticipated drop in revenues from the expiration of patents on several blockbuster drugs, sources report. Pfizer CEO Ian Read announced he will cut the drugmaker's research budget by a third to between $6.5 billion and $7 billion across the next two years, while Merck CEO Kenneth Frazier withdrew the company's long-term profit forecast in order to spend between $8.1 billion and $8.5 billion on R&D this year.
Pfizer's plans to trim its R&D spending are part of a broader plan that includes shuttering its Sandwich, UK research site and reducing staffing levels at a Connecticut facility, which are together expected to affect approximately 3500 jobs at the company. In addition, Pfizer said that it would stop funding research in disease areas such as allergy, respiratory, urology and internal medicine. Reflecting on the decision, Read said "at some point your stakeholders and shareholders demand you to have a return on investment in research," adding that "it is the fundamental heart of our company and we have to fix that core."
When Merck & Co. announced its fourth-quarter and full-year results, Frazier noted that the only way for the company to achieve its target of high-single digit EPS on a percentage basis through 2013 "would be through deeper, short-term oriented cost-cutting that would result in significant under-investment in longer-term growth prospects and could limit our ability to pursue external opportunities."
The executive remarked that "I am not blind to what investors want us to do," but noted that "as a company we believe that the only sustainable strategy in the healthcare environment that we’re in is real innovation that makes a difference to patients and payers." Frazier further commented that Merck's recent set back with the experimental anticoagulant vorapaxar illustrates the risk associated with the company's R&D plans, adding that "we recognise that our strategy comes with a certain amount of complexity, lengthiness and unpredictability."
UBS Securities analyst Marc Goodman noted that "Merck is offering investors a fundamentally different approach than Pfizer, asking investors to pay for a substantially higher R&D budget," and added that "the removal of the 2013 targets is a key negative for large-cap investors." Deutsche Bank analyst Barbara Ryan remarked that Pfizer is a "financial story" of deploying funding in shareholder-friendly ways, but noted that if Merck's strategy is successful, the company has the potential to gain a higher stock valuation. "Only the long haul will tell which choice is best," she said.
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