Merck & Co. said today it will eliminate 8,500 jobs over the next two years as part of a restructuring of R&D and commercial operations that the company says will save it $2.5 billion a year when fully implemented in 2015 – and, it hopes, end a long period of setbacks in which numerous pipeline drugs have failed to win regulatory approvals or failed in clinical trials.

The new layoffs, on top of an earlier-announced reduction of 8,500 jobs, will shrink by some 20% the company’s global workforce of 81,000 people. Merck said the multi-year restructuring is designed to enable the company to bolster its pipeline and significantly cut costs, while increasing flexibility through a more agile operating model that will target more spending to what it deems highest-potential growth opportunities.

Merck identified one such high-potential-growth program – its anti-PD-1 immunotherapy program for oncology. To that end, the company said it will create a new, integrated unit to ensure that the company is prepared to successfully bring its investigational anti-PD-1 immunotherapy MK-3475 to patients worldwide.

Oncology is one of four key therapeutic areas where Merck said it will focus its future activity going forward; the other three are diabetes, acute hospital care, and vaccines. In addition to the anti-PD-1 program, Merck identified as priorities BACE for Alzheimer’s disease (MK-8931), its next generation Hepatitis C virus program, and V503, the company’s 9-valent HPV vaccine.

Within its core businesses, Merck said it will continue to support its in-line portfolio and prepare for launches of promising pipeline drugs. R&D efforts will focus on drug “candidates capable of providing unambiguous, promotable advantages to patients and payers,” according to the company.

Merck also said it will develop some of those candidates by investing in strengthening its pipeline through new licensing and business development activities with external partners; as well as concentrate in 10 “prioritized” national markets that account for most of its pharmaceutical and vaccine revenues – the U.S., Brazil, Canada, China, France, Germany, Japan, Korea, Russia, and the U.K.

But Merck added it will reduce its global real estate footprint – especially in New Jersey, where the company is headquartered; and elsewhere, because it aims to improve the efficiency of its manufacturing and supply network.

In a separate announcement this morning, Merck said it will relocate its headquarters within New Jersey, to Kenilworth from a Whitehouse Station site the company will shutter along with a site in Summit, NJ. Merck said its Animal Health and Consumer Care divisions, now based in Summit, will be moved elsewhere in New Jersey, while unspecified “manufacturing, laboratory and other functions” now also in Summit will be relocated to other facilities in New Jersey or Pennsylvania.

“These actions will make Merck a more competitive company, better positioned to drive innovation and to more effectively commercialize medicines and vaccines for the people who need them,” Merck Chairman and CEO Kenneth C. Frazier said in a statement. “While these actions are essential to ensure that Merck can continue to fulfill its mission into the future, they are nevertheless difficult decisions because they affect our dedicated and talented colleagues. We appreciate the contributions of all our employees, and we will support them during this time of transformation.”

About $1 billion in annual savings will be realized by the end of 2014, with most of the savings coming from R&D, marketing, and administrative expenses.

Earlier this year, Frazier named Roger Perlmutter head of its R&D effort, with the mandate of reversing years of pipeline setbacks so the company can make up for sales it has started to lose due to patent-cliff expirations of blockbusters such as Singulair. Over the summer, he thinned the ranks of managers, reducing R&D spending by an estimated $144 million. But Merck has continued to face delays to clinical-stage drug candidates such as suvorexant (MK-4305) for sleep diorders, and odanacatib for osteoporosis – with the company not expected to pursue approvals for the latter until at least 2014.

Merck estimated the restructuring will result in charges of about $900 million to $1.1 billion in 2013 – most of which will be recorded in the third quarter – and between $2.5 billion and $3.0 billion in total pre-tax costs. About two-thirds of these pre-tax costs expected to result in cash outlays, primarily related to separation expense. The remaining roughly one-third are non-cash, primarily related to accelerated depreciation of facilities to be closed or divested.

Merck said it will maintain a “high” level of cash returned to shareholders through both its dividend and a stock repurchase program. 

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