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Merck's Mantra On Focus Precludes An Inversion Strategy

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Merck recently scored a major triumph for itself and melanoma patients with the approval of an important new drug, Keytruda (pembrolizumab). Keytruda is an entry in the exciting new area of anti-cancer drugs known as immunomodulators, drugs that help one’s own immune system combat the disease. Not only is Keytruda an impressive new drug, Merck’s execution in developing it is equally noteworthy. As reported by Forbes colleague Matt Herper, Merck put a heavy emphasis on this program and the drug was approved just 3.5 years after the first dose was given to patients.

This type of focus was a particular strength of Merck’s when it was the “World’s Most Admired Company". Back then, competitors both marveled at and envied Merck’s ability to marshal resources to bring home important new medicines like Vasotec (enalapril) for hypertension and Singulair (montelukast) for asthma in record time. Oftentimes Merck’s development program was able to catch up or, as happened with Keytruda, leapfrog the competition.

Merck’s CEO, Ken Frazier, has always been a believer in R&D as the future of his organization. Back in 2011, probably around the time the first Keytruda patient was being dosed, he defended his views in an interview with The Wall Street Journal saying the following.

“The most sustainable strategy is innovation. At Merck, science and translating science into medically important products has always been at the core of how Merck defines itself in the world.”

Thus, it is no surprise that with this attitude and Merck’s renewed emphasis on focus, that Frazier is down on doing a big merger in order to profit from a tax inversion. At last week’s Morgan Stanley Healthcare Conference, here is what he had to say on the topic, as taken from “Seeking Alpha’s” transcript of Merck’s presentation.

“Now with respect to Merck and tax inversion, I have been very clear that if you look at the size of the transactions that would make us eligible for an inversion we don’t see that as consistent with our strategy as a company…………And also I think frankly that there is a lot of distraction that you create when you do a big merger and I have just been talking about the benefits of focus and the ability to take a product like Keytruda which was originally going to be filed in 2019 if you look at clinicaltrials.gov at the beginning of this year and now we have a drug in a market in 2014, 3.5 years after the first patient dose. Those kinds of things require that your scientists, your commercial people be able to work together and understand what the plan is for tomorrow, five years and 10 years from now. So given the long lead times that we have in this industry I just don’t see the benefit of doing a big merger.”

Frazier is right when he talks about the distractions caused by a big merger. These transactions involve a majority of the colleagues in an organization - scientists, manufacturers, commercial analysts, etc. - all trying how best to integrate two companies. This is both hard and time consuming and can impact a company’s overall productivity. Maintaining focus during the 12+ months needed for a merger is impossible.

Merck’s focus isn’t limited to immunomodulation. This is also happening with its late stage drugs in the lucrative hepatitis C area. My guess is that the Keytruda success story has permeated the whole organization, with people revisiting drug development timelines and looking for programs where additional resources can shave off years in development time. Like any discussion about R&D prioritizations, there are never any guarantees that a particular program will be a sure success. An idiosyncratic side-effect in patients could have sunk the entire Keytruda program. But risk is part of this business and Merck, at least recently, appears to be guessing right.

Some of Merck’s competitors are going in a different direction and making mergers/tax inversions a key strategy. Will Merck’s “focus strategy”, as it did for the Keytruda program, enable it to leapfrog the competition in pharmaceutical company success? It will be interesting to see how this plays out.