Merck Looks to Streamline R&D

Last Tuesday, Drug maker Merck announced that it will lay off thousands of employees.  Merck plans on cutting 8,500 jobs, which is in addition to the 7,500 job cuts that were previously announced.  The company explains that these job cuts are a part of “a global initiative to sharpen its commercial and research and development (R&D) focus.”  In addition to these job cuts, Merck also announced that it will move its global headquarters from Whitehouse Station, New Jersey to Kenilworth, New Jersey.

What is the reason for this major overhaul?  The main reason for this overhaul is Merck has had development setbacks for its experimental drugs in cardiovascular, surgery, and osteoporosis.  This overhaul is part of a boarder strategy to improve Merck’s R&D, which also includes the hiring of Roger Perimutter to replace Peter Kim as head of Merck’s R&D.  Merck has also re-evaluated its real estate needs.  Merck has determined that it could accomplish greater cost savings and operational synergies by closing both its Summit campus and its Whitehouse facility.  This transition is expected to begin next year and be completed in 2015.

What to take away from these decisions? It seems that Merck is making these decisions by dealing with current issues and with an eye on the future.  The cost cutting decisions that Merck is making addresses past deficiencies.  The developmental setbacks for its drugs in cardiovascular, surgery, and osteoporosis have led to overspending.  In order to deal with these financial difficulties, Merck needs to reconstruct its budget.  By laying off an additional 8,500 jobs, Merck frees up money that it can use to invest in future developmental drugs.  The success of this re-investment towards the future can lead to future expansion.

http://www.usatoday.com/story/money/business/2013/10/01/merck-layoffs/2900457/

3 thoughts on “Merck Looks to Streamline R&D

  1. It definitely seems that Merck is changing its focus from quantity to quality. Instead of being geared towards output levels, they are looking more towards focusing their efforts on superior advances in their drugs. This requires more capital for research and development, which in turn means that capital needs to be taken from somewhere else in their operation. They also could have decided to issue debt in order to raise capital, but perhaps the interest rate on the debt was high, since paying back the debt would be dependent on some sort of medical advancement, and thus they decided to loosen up capital from within the company’s cost structure rather than raising it externally and having to pay the debt back as well as the high interest payments.

  2. What part of the organization were the 8,500 jobs? If they were in research this might be counter intuitive. Companies can only cut so many jobs before contracts that are time sensitive become problems. If Merck slows production and ups investment in research it might have to sell off some of its research to pay to bring its production facilities back on line. Merck had 86,000 employees in 2011. Cutting 15000 employees can make a big impact in the company and allow entrance into the market and a reduction of market share if production falls behind.

  3. What kind of setbacks? And how crucial were these upcoming operations to Merck’s operational plan going forward? These cuts seem very large; I could only imagine the firm responding in the way if these setbacks severely undermined the firm’s integrity or future outlook.

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