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UPDATE 4-Merck bets on generic biotech in strategic shift

(Adds analyst comments, updates shares)

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.

Now, however, generic biotech is an uncertain market.

No U.S. pathway exists for approval of lower-cost generic versions of biotech medicines, which are generally more complex to manufacture than pills and capsules and could be tougher to duplicate. The topic is likely to take on new urgency under President-elect Barack Obama, as lawmakers seek to cut health-care costs.

“Novartis and Teva are further along,” Michael Levesque, an analyst at Moody’s, said at the meeting. “Merck has vast financial resources to try to catch up despite the pressure on its earnings.”

Natixis Bleichroeder analyst Jon LeCroy said the anemia product could be a big drug “if they get it through,” but noted the lack of a U.S. regulatory pathway. Merck’s involvement with generic biologics “could definitely make things move” with the regulatory process, LeCroy said.

Merck research chief Peter Kim said it was unlikely regulators would allow direct generic substitution without extensive study. Merck plans the full range of clinical trials required for new drugs to support the products.

Merck’s development technology could enable the company to launch the anemia drug two years ahead of competitors that are developing similar products, Kim said.

Merck also said it is on track to reach $2 billion in emerging market sales by 2010 and is making significant investments in key markets, including China and India.

Its research pipeline has nine total medicines in late-stage development.

Among its experimental medicines, Merck touted an asthma medicine that could move into late-stage development next year, and a vaccine that targets staph infections that the company expects to seek approval for in 2011. Merck also said it was significantly investing in Alzheimer’s disease research.

Merck shares were down 47 cents at $26.53 in afternoon trading on the New York Stock Exchange.

Editing by Dave Zimmerman and Gunna Dickson

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