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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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October 23, 2008

Merck Cuts Back (Again)

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Posted by Derek

As everyone knows, Merck announced some big job cuts yesterday – 7,200 positions, around 10% of the work force. It’s worth looking at the details of these, because they differ a bit from what’s been going on at some other companies.

For one thing, the company doesn’t seem to be exiting any one therapeutic area, as Pfizer has, or rearranging their whole R&D structure the way GSK is doing. Merck just seems to be thinning things out across the whole organization. And that includes management, since they’ve announced that they’re eliminating 25% of their middle and senior manager positions. (I should note, in response to some of the more nativist comments that show up to posts like this, that Merck does not appear to be replacing these people with executives from Shanghai and Bangalore).

Overall, 60 per cent of the layoffs are taking place outside the US. That includes the complete closure of research sites in Japan (the Merck Banyu institute in Tsukuba) and Italy, as well as one in Seattle. (I have to say, I didn’t even know that Merck had research in Seattle). So it’s going to be harder to fit this one into the “traitorous execs in expensive suits send jobs to China” template.

That doesn’t mean that Merck isn’t outsourcing research work, though. The company’s press release says that they will “make greater use of outside technology resources” and “expand access to worldwide external science”. You can always make the case that job growth that might otherwise have taken place here will not, and in fact, I think that’s true. And it’s unfortunate – but it’s also true that doing the outsourced work here would be more expensive (otherwise why outsource?), so that job growth would have come at a higher cost to the companies involved.

So that’s where the argument really resides. If you believe that drug company profits are coupled to eventual productivity, then outsourcing makes sense, because it decreases costs. Of course, you then have to cut that estimate back some, because outsourcing (in a great number of cases) is not as effective as doing the work in-house. Does that cancel out the cost savings, or not? I think if you choose your outsourced work judiciously, the savings are real, even after you take efficiency into account. Handled poorly, of course, you could outsource your way into the dumpster. It’s a tool, and tools can be used wisely or well.

Then we get into the second-order arguments – the ones that go beyond money and effectiveness. I realize that there are many people who, although they may argue that outsourcing research is not all it’s cracked up to be, would still be against it even after stipulating its efficacy. For these people, it’s wrong even if it does work. I will not be able to convince anyone in this camp, just as I don’t see them convincing me. If we’re arguing about numbers, there can possibly be an end to the discussion at some point – but if we’re arguing about morals, there can’t. I’m willing to make my own moral arguments, to go along with my utilitarian ones, but the audience for whom those appeals would be crucial is the one least likely to be convinced by them.

Comments (20) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. LooseKannon on October 23, 2008 8:39 AM writes...

If the Treasury wants to make an investment that’s going to pay for itself and then some, contribute meaningfully to our well being, and lessen the burden of the overwhelming cost of health care, they should throw a few billion at medical research facilities while they’re busy putting expensive band-aids of questionable value on the wounds of avarice.

If hundreds of billions can bail out the bacteria on Wall Street, a fraction of that can go toward the investigation of bacteria sitting in a petri dish.

Save money, save lives. Win-win.

www.loosekannon.com

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2. Anonymous on October 23, 2008 8:46 AM writes...

The Seattle site is presumably the old Rosetta Inpharmatics that Merck forked up $620M for in 2001.
Doesnt look like the bioinformatics investment paid off.

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3. Keith Robison on October 23, 2008 8:47 AM writes...

Merck Seattle is probably the Rosetta Informatics group, a microarray, RNAi & other genomics effort which Merck acquired during the genomics go-go years (and which has produced some pretty nice publications both before and after that date)

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4. Hap on October 23, 2008 10:04 AM writes...

They have to do what they have to do to make money, though I wonder what will be left when they are done.

I assume the lack of money and the lack of understanding of why research hasn't been as productive is why they aren't trying to change their research strategies rather than simply cutting them (and replacing them with cheaper ones). If companies don't improve research, the cuts will mean that they can survive research starvation longer but will eventually starve anyway.

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5. LabRatUK on October 23, 2008 10:17 AM writes...

Do people really think Merck will eliminate middle-management positions? All too often such people are simply 'eliminated' to another area of the organisation. The numbers of such managers at my company beggers belief in certain areas, and they have again been largely unscathed in the recent well publicised round of redundancies.

Derek writes knowledgeably about outsourcing - if used sensibly everyone benefits, if not it is a quick route to ruin. Which of these gargantuan firms will strike the correct balance I wonder... If any of course!

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6. CMC guy on October 23, 2008 10:18 AM writes...

Outsourcing (at least in Development) can be tricky to implement and as pointed if not done well can be ineffective and inefficient so any "saving" disappear with additional work required. In general the execution costs of performing a project are not drastically different internally vs. external but the big variance is in the infrastructure/burden expensive that makes outsourcing look attractive to bottom line accounting. Building and maintaining good (trusting) long-term relationships are the key aspects to success rather than treating contractors like an expendable function. My real concern is that way industry is headed no one will really know and understand the requirements and connections so can be managed well enough to avoid common mistakes so the "new" model will be worse than the old.

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7. John Bigbooty on October 23, 2008 10:21 AM writes...

It would appear that Merck is cutting the more expensive people from the company. I know for a fact that many seniors who are under the retirement age have lost, or are going to lose their jobs. Now is a tough time to be in the pharma industry. It is not any better in academia either. I know of some top researchers who have substantial getting grants funded.

Hap makes a point about what will be left when they are done with cuts.

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8. processchemist on October 23, 2008 11:05 AM writes...

Bad news as always. Also if this times managers will be not saved (quite a difference looking at other cuts around), again good results are not a shelter: in Italy is IRBM that will be closed. Same folks that few months ago delivered raltegravir.

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9. CMC on October 23, 2008 11:19 AM writes...

CMC

I know something about companies "treating contractors like an expendable function". Last time I've been involved in such a project they got poor results, my team an hell of a time. For a (western) outsourcing company working in process dev. nothing can be lethal as a mediocre project manager from Big Pharma on the customer side, ever waving the usual threat ("Should we move this project to India?")....

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10. Anonymous on October 23, 2008 2:50 PM writes...

Shame on IRBM, since they just got the first in class HIV-integrase inhibitor on the market.
I see a tendency in the industry that small sites are vulnerable to be closed down and the research are concentrated to a few big sites. Roche closing down Palo Alto is another example.

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11. someone on October 23, 2008 4:22 PM writes...

Merck has been doing a R&D overhaul for the last few years and I think in 2006 limited their research focus on core therapeutic areas so they are either ahead of the game (compared to Pfizer/GSK) or just have one less place to turn things around.

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12. Petros on October 24, 2008 7:15 AM writes...

So this will eliminate all Merck resaerch sites outside the UK won't it. Harlow (UK) went last time around

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13. Anonymous on October 24, 2008 12:14 PM writes...

I hear that 1/3 of the Seattle folks are moving to Boston...

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14. fred on October 24, 2008 1:16 PM writes...

They are spending about 2 billion (downsizing costs) to save about 4 billion. I'm not an MBA (thank God!), but it would seem to me that trimming the dividend for a few years would be a smart way to trim costs without gutting the company infrastructure.

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15. Hap on October 24, 2008 4:08 PM writes...

Not if your pay depends on stock options, I think. Unless it depends on long-term stock value, cutting the dividend should cut their stock prices (unless it's written as a temporary measure, which isn't likely). The upper management would have to be making a long-term bet on their ability to improve productivity and profit - considering that lots of other people don't seem to have any idea how to improve the latter (and the former presumably depends on the latter), that would be a really daring bet. Upper management only seems to make "bets" that are sure to pay off, and so making a low-probability, high-payoff bet would be out of character. (They'd also be betting that they would be there for it to pay off, perhaps.)

As a functional point, does their credit depend on their stock value? If credit becomes harder to get, then if they actually could improve research, they might not have the money to do it (though I don't know if they have cash on hand and how much).

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16. BackN on October 24, 2008 10:30 PM writes...

"cutting the dividend should cut their stock prices"

No. It means they have more free cash on hand, stock 'intrinsic worth' goes up. But people who bought the stock for dividend may sell. Push and pull between the two.

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17. Soumojeet on October 28, 2008 8:06 PM writes...

Peter Kim is running this company into the ground. Decisions are being made by cost cutters and science is suffering. In addition the turn-over is very high and morale is at an all time low.

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18. S Silverstein on October 29, 2008 2:33 PM writes...

"The Seattle site is presumably the old Rosetta Inpharmatics that Merck forked up $620M for in 2001."

While in Nov 2003 ditching most of their internal bioinformatics dept.

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19. freddyfk'd on December 7, 2008 7:28 AM writes...

Merck trimmed middle management -retirement packages, they then anounced a basic research global operating stratagee which included closing the Italian, Japanese, and Rosetta site, - 1/4 rosetta will come east to westpoint. In addition, they decided to make each remaining internal research site focus on a specific target. That will make it easier to cut the whole site when they decide no more to one or another target. Now they are in the process of laying off the 1200 Americans, (7200 world wide), first dientifying them by target, then by quality of work. They have been trimming the bottom for 6 years straight!~ who is left!

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20. Sam on October 20, 2011 2:32 AM writes...

If Derek is saying that Merck is implementing a strategy (i.e. job cuts and not exiting any one therapeutic area) that is different from other companies, does this mean that Merck has the worst strategy among them?

And why is Merck doing all these things? Will they maintain their position as the second largest pharma company once their largest-selling drug, Singulair, expires?

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