UPDATE 4-Merck bets on generic biotech in strategic shift

(Adds analyst comments, updates shares)

By Ransdell Pierson and Lewis Krauskopf

WHITEHOUSE STATION, N.J., Dec 9 (Reuters) - Merck & Co (MRK.N) plans to break into biotechnology medicine, including a major push into the developing market for generic biotech, as it confronts challenges to its product line.

The move into generic biologics, announced on Tuesday at Merck's annual business day, marks a significant shift for the drugmaker into territory primarily targeted by generic companies, and underscores the growth hurdles Merck faces.

"Next year will continue to be a period of fundamental transformation that establishes Merck as a different competitor for the next decade," Merck CEO Richard Clark told analysts and investors at the meeting held at its New Jersey headquarters to review its business operations.

Merck shares have fallen more sharply than rival drugmakers this year as it has seen demand falter for its Singulair asthma drug, Gardasil cervical cancer vaccine and its cholesterol fighters, Vytorin and Zetia.

The drugmaker, whose shares fell 1.7 percent on Tuesday, last week forecast 2009 earnings below Wall Street's targets, citing sluggish sales for key medicines and negative foreign currency trends. It repeated that forecast on Tuesday.

Merck, which faces looming patent expirations, is also cutting 7,200 jobs on top of an earlier restructuring.

Mike Krensavage, principal at Krensavage Asset Management, said the generic biotech move was "a rather significant departure for a company that was so focused on once-daily pills."

"If a company was able to produce enough novel pills, it wouldn't need to go into biologics," Krensavage said. "To copy other people's biologics may admit that the company was overly optimistic about its pills."

Several other analysts and money managers interviewed at the meeting said there was not a great deal of major news, outside of the biotech effort.

Merck is moving to diversify its portfolio by creating a new division, Merck BioVentures, which leverages a platform for both new biologics and so-called "follow-on" biologics -- or generic biotech medicines.

Many drugmakers are investing more into the lucrative area of biologics, which treat conditions such as cancer, multiple sclerosis and rheumatoid arthritis and are derived from living cells as opposed to synthetic chemicals. There were $94 billion in 2007 global biologics sales, according to Merck.

Merck has no such biologics on the market now, and will leverage its 2006 purchase of GlycoFi to break into the area.

By pushing into generic biotech medicines, Merck will be competing with generic drugmakers such as Teva Pharmaceuticals Industries (TEVA.O) and Novartis' (NOVN.VX) Sandoz unit.

The company said its first follow-on biologics program, MK-2578 for anemia, is in clinical development and it plans to launch it in 2012. Merck expects to have at least five follow-on biologics in late-stage development by 2012.