Merck signals interest in medical devices
Friday October 28, 6:06 pm ET
By Lewis Krauskopf and Ransdell Pierson
NEW YORK (Reuters) - The new chief executive of Merck & Co. Inc. on Friday told a group of analysts he may consider expanding into medical devices and diagnostics as a way to revive the company's fortunes.
Merck (NYSE:MRK - News) CEO Richard Clark mapped out options for the company in the private meeting. JP Morgan analyst Chris Shibutani, who attended the meeting, said Clark stressed that change needs to come, but "change is not synonymous with cutting costs."
"Longer-term, we heard for the first time of the potential for how Merck could even envision itself as a company with businesses beyond pure pharma (pharmaceuticals), to include devices (implantable) and diagnostics as well," Shibutani said in a research note.
Merck spokeswoman Amy Rose confirmed the meeting took place, adding that the drugmaker is examining its options but that "no decisions have been made."
Rose said that Clark did not provide any material information at the meeting, and will outline his plans by the end of the year. Shares of Merck rose 2.3 percent on Friday, slightly better than the 1.4 percent rise in the drug sector.
A federal law, known as Regulation FD, bars publicly traded companies from selectively providing material information that could affect share prices.
An executive who offers a general assessment of expected company trends may not run afoul of the regulation, said Boris Feldman, a partner at law firm Wilson Sonsini Goodrich & Rosati of Palo Alto, California.
"For Regulation FD purposes, you have to assess how soon, how firm and how much" information is provided, he said.
Merck is facing declining earnings due to generic competition and the withdrawal last year of its painkiller Vioxx, which had $2.5 billion in annual sales. The company also faces more than 5,000 lawsuits from former Vioxx users and their families, who allege the drug caused heart attacks and strokes.
In his note, Shibutani said Clark "postulated that Merck's evolutionary morphing should occur in ways which best meet changing market dynamics. Concretely, this could mean either acquisition or partnership with implantable devices or diagnostics businesses which align with disease areas."
In earlier years, drugmakers such as Pfizer Inc (NYSE:PFE - News), Eli Lilly and Co. (NYSE:LLY - News) and Bristol-Myers Squibb Co (NYSE:BMY - News) jettisoned their device units, because sales growth of medical devices was far lower than their prescription drugs.
But earnings of all three of those companies, and other large U.S. and European drugmakers, have been slammed more recently as sales of major drugs evaporated due to competition from generics. The large drug makers also have failed to come up with new drugs to replace those sales.
Stocks of large drugmakers are no longer considered "safe havens," because of slowing or declining profits, which have been worsened by drug recalls and resistance by insurers to high drug prices.
The Standard & Poor's Medical Device Index (^GSPMED - News), comprised of large device makers, is up 15 percent since early 2001, compared with a 32 percent decline in the American Stock Exchange Pharmaceutical Index. (AMEX:^DRG - News)
"It could be a good diversification move because devices have been doing very well in the past two years," said Mehta Partners analyst Shaojing Tong, who cautioned that he would not welcome such a move unless Merck clearly explains its merit.
"If Merck is even talking out loud about the possibility of getting into devices and diagnostics, they must have thought long and hard about it," said Tong, who did not attend the meeting.
Devices present a way to deliver drugs in a "more efficient and efficacious way," David Webster, president of the Webster Consulting Group, said in an interview last week.
"Historically, many pharma companies have tried to divest from such activity. But today, one of the most lucrative frontiers in medicine is the marriage of pharmaceutical products and devices that deliver those pharmaceuticals," Webster said.
Clark, who was named CEO in May, made his first major appearance before investors during the company's conference call with investors on Monday.
Shares of Merck rose 62 cents to $27.54 on the New York Stock Exchange. The shares are down 14 percent this year.
(Additional reporting by Jonathan Stempel in New York and Debra Sherman in Chicago)
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