Merck & Co.'s CEO said Thursday that setbacks in drug development and other problems made his just-ended first year a tough debut.
But Kenneth Frazier expects better news in 2012 for the maker of diabetes blockbuster Januvia and Singulair for asthma and allergies.
Speaking to analysts at the Goldman Sachs' Healthcare CEO's Unscripted conference in New York, he said some important new drugs are on the horizon and Merck is pursuing deals for others in late testing. Those are more likely to pan out and make it to the market.
That shift might hint at trouble, according to Erik Gordon, an analyst and professor at University of Michigan's Ross School of Business.
"Looking for late-stage deals is not a sign of confidence in the internal late-stage pipeline," he noted. "Nothing is more expensive than a late-stage deal."
Until now, the Whitehouse Station, N.J., company has mainly pursued acquisitions of experimental drugs that are early in testing, when the deals are cheaper and there's less chance of getting into a bidding war.
"Last year, it couldn't possibly have started worse than it did," Frazier said.
In January, right after Frazier took the helm, Merck unexpectedly ended a late-stage study of a blood thinner that might have been a blockbuster, vorapaxar, due to bleeding risks. In June, Merck and partner Intercell AG halted a study of a potential vaccine for dangerous Staph infections because it wasn't working _ and patients who got the vaccine were more likely to die.
Meanwhile, Merck's 2011 return to shareholders _ quarterly dividend payments plus stock-price appreciation _ was the lowest among its peers.
"Certainly, I'm not pleased to be at the bottom of the industry," Frazier said, adding that, "Quietly, some really good things got done after those bumps in the road last year."
Merck resolved arbitration with Johnson & Johnson over rights to two important drugs for immune disorders, retaining most of the revenue its Schering-Plough unit had been receiving for helping to market Remicade and Simponi. The dispute followed Merck's $49 billion acquisition of Schering-Plough in November 2009, which triggered some major cost-cutting.
"We have about $2.8 billion of our $3.5 billion synergy target in the bag," Frazier said, and the company now is aiming to cut about $1.4 billion a year more.
Merck also made two key deals to increase its manufacturing and product sales in Asia, and is on target to produce 25 percent of its annual sales from such emerging markets by 2013.
"I'm starting to see opportunities" this year, Frazier added.
Among those, Merck plans to seek U.S. approval of an insomnia drug without next-morning sleepiness, suvorexant, and of Bridion, a drug for reversing anesthesia after surgery that's approved in many other countries but was rejected in the U.S. in 2008 over concerns about allergic reactions seen in some patients during testing.
Last November, Merck said it planned in 2012 and 2013 to seek U.S. approval for eight medicines, including two allergy medicines and drugs for hardening of the arteries and osteoporosis, plus V503, an improved version of its blockbuster cervical cancer vaccine Gardasil.
"Over time, I would see more of a shift toward specialty" drugs, plus heart and diabetes medicines, Frazier said. "We're very interested in areas like hepatitis C, HIV and rheumatoid arthritis."
Specialty drugs are for complex, chronic illnesses, are generally injected and are almost always expensive.
Frazier added that Merck is focusing research mainly on areas where it can be a market leader and is decreasing the number of diseases on which it does research. Many of its rivals have adopted the same strategy, partly because of the need to get a bigger bang out of each buck spent on costly research.
"I am trying to run the company for the long term," Frazier added, while producing enough short-term successes to satisfy investors.
In afternoon trading, Merck shares added 45 cents to $38.78.