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Saturday, August 24, 2013

Fred Astaire and Merck

"Can't sing. Can't act. Slightly bald. Can dance a little."

This was note written by an RKO executive after watching a screen test of Fred Astaire. Fred went on to do pretty well for himself. He contributed to the best years of MGM Studios. Later the studio fell from grace proving that success can be a fleeting thing. The documentary, "That's Entertainment" has some very interesting before and after footage of MGMs rise and fall. Fred Astaire narrates his segment from a run down backlot set where he had filmed The Bandwagon. MGM was in trouble financially and selling off the backlot. "That's Entertainment" was the last major production filmed there.

I like to compare Hollywood to the biopharma business because they have a similar perilous existence. A blockbuster movie or drug can bring in a lot of money creating the illusion that what you are currently producing is a part of your success. What a studio and a drug company must alway have is a pipeline of new products that will generate that next blockbuster. Once you've got your blockbuster, there is a window of peak earning. When the earning slows to a trickle, you look towards the pipeline. The pipeline is nurtured by the guys who say things like, "Can't sing, can't act..."

The job of nurturing the next big thing is tough. There is no road map. The last big thing doesn't always tell you what will work next time around. There is always the prospect that you could fall just like MGM, once the most powerful studios in all of Hollywood. Which brings me to Merck. How much trouble are they in?

In 2011 they began layoff off people to reach the goal of 13,000 less employees. Any Fred Astaires in that group? Then we get this report suggesting further cuts.

As pressure builds on MRK mgmt to: (1) improve R&D productivity, (2) maintain top-tier operating margins, and (3) continue returning cash to shareholders, we believe a deep restructuring should be seriously considered in light of the relatively lackluster 2013 top-line performance, disappointing Ph III/ registrational pipeline evolution (odanacatib, suvorexant, Bridion U.S.), and overall industry challenges. We estimate that every $1B reduction of operating expenses would add $0.25/share to MRK's bottom line

As one commenter said on the Forbes website:
Wrong! Investment in R&D now means profitability in 5 to 10 years. If Merck has a lackluster performance now its because they listened to this sort of “advice” in the last decade. It makes no sense for the company – slow suicide so Wall St can make an extra buck.
This is quite clear to those of us with an interest in the science, not the financial spreadsheets. As George W. Merck said, "We never try to forget medicine is for the people. It is not for the profits. The profits follow, and if we remembered that, they have never failed to appear. The better we have remembered it, the larger they have been." Good medicine comes from good science. You have to remember how this science works. It takes many years from start to finish. Often times the finish is disappointing. To divest in the process because of the current lot of disappointments is a misunderstanding of timeline of this science. 

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