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Apr 20, 2012

Merck KGaA Sitting Out M&A Dance to Focus Instead on Cuts, Pipeline

  • The chairman and CEO of Merck KGaA says it will hold off on pursuing mergers and acquisitions through next year, focusing instead on cutting jobs and costs as the company tries to recover from several setbacks to its drug pipeline.

    Speaking at Merck KGaA’s annual shareholder meeting this morning, Karl-Ludwig Kley said his company will abstain from M&A activity while his company carries out the first phase of a restructuring. Dealmaking, however, is still an option.

    "We do not plan to make any major acquisitions during this first phase of the program. However, we will continue to strengthen our business through in-licensing or targeted acquisitions if the opportunities arise," Kley said, according to a text of his prepared remarks.

    Kley spoke almost two months after Merck KGaA outlined its planned cuts or “efficiency program” to run through 2018. This year, Merck is rolling out a new business structure headed by a leadership organization designed to streamline its operations and speed up decision-making.

    Again today, as in February, Kley did not offer specifics of the restructuring such as how many jobs will be eliminated, or how much in costs Merck KgaA aims to save annually. Merck KGaA employs more than 40,000 staff worldwide, of which 9,000 are based at its headquarters in Darmstadt. Kley did say that the company would cut jobs in Germany on a voluntary basis and has already had talks to that effect with German employee representatives.

    “Over the next two years Merck needs to address unprecedented market shifts, increasing competition in key product areas and existing inefficiencies in its own organization to ensure the long-term success of its business model,” Kley said in the February 24 statement announcing the outline of cuts. "We will therefore progress with our planned efficiency program in order to deliver recurring cost reductions and free up resources for investment in promising growth areas.”

    Last month, Merck KGaA warned that its operating profit this year would decline as a result of the planned cutbacks, which follow the failure of Merck KGaA’s drug candidates for cancer and multiple sclerosis (MS). In June 2011, Merck KGaA ended efforts to gain approval for the oral immunosuppressant MS drug cladribine, a candidate in Merck Serono’s pipeline. The decision followed a complete response letter from FDA indicating that new studies were needed to satisfy safety and risk-benefit concerns as well as an EMA determination that clinical data did not sufficiently justify adding an MS indication for cladribine, which is approved for hairy cell leukemia.

    And in 2009, the EMA rejected Merck KgaA’s application to add a new indication for Erbitux of first-line treatment of lung cancer, irrespective of patient expression of the epidermal growth factor receptor (EGFR). Merck last year resubmitted its application to EMA for the drug but narrowed the proposed indication to first-line treatment for non-small-cell lung cancer patients in combination with a platinum-based chemotherapy agent.

    Earlier this month, an effort to add another cancer indication saw a setback when a study published in Journal of the American Medical Association showed that adding Erbitux to chemotherapy did not improve disease-free survival in patients following surgery for stage 3 colon cancer, in which the disease has spread to lymph nodes surrounding the colon but not to other parts of the body.

    In another pipeline setback, Merck Serono last October returned all rights for the Phase III-stage Parkinson disease candidate safinamide to Newron Pharmaceuticals, in a move that took effect this month. At the time, the Merck KGaA division said its decision was made as part of an ongoing review of its R&D pipeline, after concluding that safinamide has a more limited market potential than originally anticipated.

    According to IHS, Merck KGaA’s most promising new compounds include the Phase III-stage integrin inhibitor, cilengitide for glioblastoma. The firm said it expects Phase II results this year for atacicept in systemic lupus erythematosus (SLE) and anti-integrin mAb DI17E6 in prostate cancer. Kuvan is already on the market for PKU.

    Shortly after the restructuring and cuts were announced, Jack Scannell, an analyst at Sanford C. Bernstein, told Bloomberg that Merck KGaA faced an additional pipeline challenge of growing competition for its MS drug Rebif (Interferon beta-1a) from newer treatments. One of them, the once-daily oral drug Gilenya® (fingolimod), received a positive risk-benefit profile from the EMA's Committee for Medicinal Products for Human Use (CHMP), Novartis announced today.

    However, Gilenya patients in Europe are also advised to measure ECG and blood pressure prior to the first dose, and each hour during the six-hour first-dose monitoring period, with continuous ECG monitoring recommended for at least six hours following the first dose.

    Last month, Merck KgaA reported a 2.3% dip in net profits to €617.5 million (about $815.5 million) compared with €632.1 million ($834.9 million) in 2010. While total revenues rose 10.6% to €10.276 billion ($13.6 billion), the company saw operating results drop 11.5% to €985.1 million ($1.3 billion), a figure that excludes one-time items such as integration costs and amortization of intangible assets connected to its Merck Serono and Merck Millipore operations.


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