Merck yanks forecast to spare R&D as Pfizer cuts

NEW YORK (Reuters) - Merck & Co (MRK.N) new chief Kenneth Frazier is refusing to take a hatchet to the drugmaker's research budget, a strategy that contrasts with rival Pfizer Inc and is costing him shareholder support.

Frazier surprised investors on Thursday by withdrawing the No. 2 U.S. drugmaker's long-term profit forecast due to pressure to curb the pricing of its medicines and dimmed hopes for an experimental blood clot treatment.

But he said he would not engage in "indiscriminate" cost cutting that would threaten new drug research in order to meet the company's 2009 to 2013 profit goal of high-single-digit annual growth. Merck spends more than $8 billion annually on research and will now be the industry's heaviest spender.

"It isn't we couldn't cut costs enough to make long-term guidance. We couldn't do that fast enough without sacrificing opportunities" to invest in drug research, Frazier told investors in a conference call on Thursday.

Frazier's decision stood in stark contrast to that of new Pfizer (PFE.N) CEO Ian Read, who said on Tuesday the world's largest drugmaker would slash its R&D budget by up to $2 billion, including eliminating thousands of researchers, to meet its 2012 profit forecast. Read also announced a $5 billion stock buyback to soothe Pfizer investors.

The differing strategies of the freshly minted CEOs underscore a long-standing debate in the industry: Are drug companies spending too heavily on research, given the paucity of new medicines coming out of their laboratories?

So far, investors appear to have sided with Pfizer, whose shares jumped more than 5 percent after its announcement, while Merck fell 3 percent on Thursday.

CONFIDENCE IN RESEARCH

Merck's approach could eventually win over the market if the company is able to make good on the promising experimental medicines it is developing.

"Merck probably has more confidence in its research and development than Pfizer, and I believe that Merck's research and development has been more productive than Pfizer's," said Mike Krensavage, principal at Krensavage Asset Management.

Krensavage pointed to Merck's Januvia diabetes treatment and Gardasil cervical cancer vaccine as evidence of the drugmaker's recent productivity. Pfizer's own labs have produced no big-selling medicines since its Viagra impotence drug was introduced in 1998.

Merck also forecast 2011 profit that fell short of Wall Street estimates, and reported better-than-expected fourth-quarter results on Thursday.

Investors had considered Merck, buoyed by its 2009 purchase of Schering-Plough for $41 billion, better positioned to weather an influx of generic versions of their biggest brands.

But that changed last month when Merck's most promising drug from that acquisition, vorapaxar, was deemed unsuitable for stroke patients, shrinking sales prospects that had been forecast at more than $3 billion.

Many other U.S. and European drugmakers have also eliminated jobs and curtailed research to shore up profits, and Frazier did not rule out doing so in the future.

Analysts said that removing the long-term assurance on performance will hurt Merck's shares short-term.

"It seems like they are asking shareholders to absorb all extra expenses rather than finding internal sources to share resource needs," Credit Suisse analyst Catherine Arnold said in a research note.

Merck was among the last of the big drugmakers to report quarterly results. British-based rival GlaxoSmithKline Plc (GSK.L) projected confidence it has turned a corner and said it would resume buying back its shares this year.

JANUVIA, SINGULAIR SALES HELP QUARTER

Merck reported better-than-expected fourth-quarter sales and earnings, helped by Januvia, Singulair for asthma and rheumatoid arthritis treatment Remicade.

It posted a fourth-quarter loss of $500 million, or 17 cents per share, including a charge of $1.7 billion related to the major setback in clinical trials for vorapaxar.

That compared with a profit of $6.5 billion, or $2.35 per share, in the year-earlier period, when it recorded a big gain related to its purchase of Schering-Plough.

Excluding one-time items, Merck earned 88 cents per share in the quarter. That topped the average forecast of 83 cents among analysts polled by Thomson Reuters I/B/E/S.

Merck said it expects full-year 2011 earnings of $3.64 to $3.76 per share. Wall Street had been expecting $3.82 per share. The company said it expects revenue to grow in the low- to mid-single digit percentage range.

(Additional reporting by Lewis Krauskopf; Editing by John Wallace, Dave Zimmerman and Matthew Lewis)