Merck has announced a global initiative to sharpen its commercial and research and development (R&D) focus. The multi-year initiative will enable Merck to better target its resources behind those opportunities that have the potential to deliver the greatest return on investment, including bolstering its pipeline and implementing a more agile operating model, with a significantly reduced, more flexible cost structure.

“These actions will make Merck a more competitive company, better positioned to drive innovation and to more effectively commercialize medicines and vaccines for the people who need them,” said Kenneth C. Frazier, chairman and chief executive officer, Merck. “Today’s announcement further underscores that we are committed to improving our performance in the short term while also investing for the long term to create value for patients, customers and shareholders.”

The company expects to realize approximately $2.5 billion in annual net cost savings by the end of 2015 and estimates that $1.0 billion, or 40 percent, of the savings will be realized by the end of 2014. The company anticipates that the substantial majority of savings will come from marketing and administrative expenses and R&D. These savings are off of the company’s full-year 2012 expense levels. By the end of 2015, the workforce reductions announced today, combined with pending, previously announced reductions of approximately 7,500, will result in a decrease of about 20 percent in Merck’s total global workforce of 81,000 employees. Total pre-tax costs for the new restructuring program are estimated to range between $2.5 billion and $3.0 billion. The company estimates that approximately two-thirds of these costs will result in cash outlays, primarily related to separation expense, and approximately one-third are non-cash, primarily related to accelerated depreciation of facilities to be closed or divested.

“While these actions are essential to ensure that Merck can continue to fulfill its mission into the future, they are nevertheless difficult decisions because they affect our dedicated and talented colleagues. We appreciate the contributions of all our employees, and we will support them during this time of transformation,” said Frazier.

Overall, this global initiative will focus on three key areas:

Redesigned Operating Model and Reduced Cost Base
•The company evaluated all aspects of how it operates as a business and is adopting a significantly streamlined and more flexible cost structure and operating model in response to business challenges and the rapidly changing external environment.
•Through new cost efficiencies, the company will: ◦Better allocate resources across the enterprise to those areas that present the highest-potential growth opportunities, such as its anti-PD-1 immunotherapy program for oncology;
◦Invest in new licensing and business development activities to acquire external innovation and commercial opportunities to strengthen the pipeline; and
◦Maintain a high level of cash returned to shareholders through both the dividend and the company’s stock repurchase program.

•The company will also reduce its global real estate footprint, particularly in New Jersey where it is headquartered. It will also continue to move forward with ongoing plans to improve the efficiency of its manufacturing and supply network.

Sharpened Commercial Focus
•Within the core human pharmaceutical and vaccine business, Merck will continue to support its in-line portfolio and prepare for promising launches in the pipeline.
•The company will increase its focus on the key therapeutic areas that meet unmet medical needs, provide the best opportunities for the business and deliver the greatest value for customers – diabetes, acute hospital care, vaccines and oncology.
•Merck is creating a new, integrated unit to ensure that the company is prepared to successfully bring MK-3475, its investigational anti-PD-1 immunotherapy, to patients throughout the world.
•Geographically, the company will increase its focus in ten prioritized markets, which account for the majority of revenue in its pharmaceutical and vaccine business. These markets are the United States, Japan, France, Germany, Canada, United Kingdom, China, Brazil, Russia and Korea.

Refocused and Prioritized Research and Development
•Merck has prioritized its R&D efforts to focus on candidates capable of providing unambiguous, promotable advantages to patients and payers.
•This focus will include programs such as the company’s anti-PD-1 immunotherapy program in oncology, BACE for Alzheimer’s disease (MK-8931), its next generation HCV program and V503, the company’s 9-valent HPV vaccine.
•Merck will pursue emerging product opportunities independent of therapeutic area or modality and build its biologics capabilities.
•The company will out-license or discontinue selected late-stage clinical development assets and reduce its focus on platform technologies.
•The company will make externally sourced programs a greater component of its pipeline strategy.