Merck KGAA Begins Transformation Effort By Closing Geneva Site
This article was originally published in The Pink Sheet Daily
Executive Summary
The efficiency program outlined by the German pharma in February will mean elimination of 500 Merck Serono staff in Switzerland, with another 750 employees being redeployed to Germany, China or the U.S.
A state-of-the-art biotechnology facility acquired in Merck KGAA’s $13 million buyout of Serono SA in 2006 will be shuttered and listed for sale as part of the German pharma’s ongoing transformation effort.
In an April 24 announcement, Merck KGAA, the parent company, outlined significant changes at its pharmaceutical and drug-development division Merck Serono SA, based in Geneva, Switzerland. The 725,000-square foot building, which cost $1.25 billion to construct on the Lake Geneva waterfront, will be put up for sale, with Merck Serono headquarters consolidated at the parent company’s campus in Darmstadt, Germany.
The company previously had indicated in 2011 that it had plans to increase efficiency across businesses and in February it provided some details, but not specifics about number of positions or locations.
Of 1,250 people currently in Geneva, Merck says more than 750 people will be transferred, either to Darmstadt; Beijing, China; or Boston. The pharma also will eliminate about 500 positions - a consultation process with employee councils was slated to begin April 25. Greater specificity about the transformation effort is expected during an analyst presentation on May 15 (Also see "Merck KGaA Changes Manager Incentives, But Stays Mum On Job Losses" - Pink Sheet, 8 Mar, 2012.).
In a statement, Stefan Oschmann, who joined Merck KGAA a little over a year ago as head of its pharmaceuticals business sector, said the reductions and transfers are necessary to “ensure our global competitive position in a rapidly changing market and to secure the long-term future of the company.” The company is committed to “socially responsible” solutions for affected employees, including a plan to offer up to €30 million (approximately $40 million) in seed money to back spin-outs focused on proprietary activities and compounds not core to Merck Serono’s revised direction.
By maintaining two manufacturing sites in Switzerland – Aubonne and Corsier-sur-Vevey – and closing a third – Coinsins, Merck intends maintain a manufacturing presence in Switzerland, albeit a leaner one. About 80 jobs across those three sites will be eliminated, the company said, with Coinsins operations being relocated to Aubonne. About 130 technical manufacturing personnel now based in Geneva also will be transferred to Aubonne.
In February, the company announced the plans for transformation, largely in response to coming generic competition for top-selling drugs Rebif (interferon beta-1a) and Erbitux (cetuximab), as well as high-profile, late-stage clinical setbacks, including the halt of oral multiple sclerosis candidate cladribine and Phase III Parkinson’s disease candidate safinamide (Also see "Diversification Fails To Protect Merck KGaA From Industry Pressures" - Pink Sheet, 27 Feb, 2012.).
Rebif was acquired in the 2006 purchase of Serono, a transaction that otherwise has been a disappointment, providing the parent company primarily with clinical development disappointments [See Deal]. Rebif, which goes off-patent in 2015 in Europe and 2022 in the U.S., generated $1.7 billion in worldwide sales in 2011, 28% of Merck Serono’s net sales for the year. Erbitux, which loses EU exclusivity in 2014, earned $1.13 billion on the year – both were largely flat, with growth rates of about 3.5% over 2010, and together accounted for 43% of prescription drug-unit’s annual sales.
With many analysts taking a wait-and-see attitude toward the pharma and its planned new direction, one outlier is Deutsche Bank AG’s Holger Blum. In an April 3 note, Blum rates the company’s shares “buy” as he asserts that most analysts have badly undervalued the Merck Serono pipeline.
“We believe the Street is wrong in assessing zero value for Merck’s pipeline,” Blum wrote. “We highlight TH-302 as the most promising pipeline compound with blockbuster potential.”
TH-302, a hypoxia-targeted compound in Phase III development in soft tissue sarcoma, as well as investigation in other types of cancer, was in-licensed for $25 million upfront in February from Threshold Pharmaceuticals Inc.[See Deal]. It has yielded promising Phase II data in pancreatic cancer, noted Blum, who pegs a €3.5 billion peak sales target for the compound. It has a novel mechanism of action and data in more than 600 patients so far, he added.