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Remaking Merck Serono

Post-Serono: Merck KGaA reducing costs to buy time to find novel assets

Five years after spending $13.2 billion to acquire Serono S.A. as a growth platform, Merck KGaA finds itself with much higher pharmaceutical sales than it could have achieved on its own, but no obvious way to sustain them. The company's challenge is twofold: on the one hand, the pharma division has a cost base higher than its peers, and on the other, it lacks a pipeline of products to hold up the top line as sales of mature products flag.

To deal with the first problem, Merck in February announced a cost-cutting program aimed at trimming the fat across all its businesses and functional areas. Details are not disclosed, but the company has recently brought on a CFO who is fresh from a restructuring of his last company, chemicals firm Lanxess AG.

Meanwhile, there are signs Merck is working on the other problem Serono was supposed to fix but didn't: a thin pipeline.

The company did twice as many deals last year as it has done in each of the years since acquiring Serono. These recent deals have sought out novel approaches or me-betters in the core therapeutic areas of autoimmune, cancer and neurodegenerative diseases.

More than half of last year's deals were for discovery stage assets or technologies.

Unlike other pharma companies, one tactic Merck KGaA is unlikely to employ is separating its pharmaceutical and other businesses. While almost 60% of its 2011 revenues came from Merck Serono, its life sciences tools business is high growth, and its performance materials business has high margins.

The consumer healthcare business could one day be a candidate for divestment, but probably not until its margins are improved, according to Markus Manns of Union Investment, which held 0.35% of Merck at Sept. 30.

Two out of three

In 2006, prior to the acquisition of Serono, Merck had €1.9 billion ($2.5 billion) in worldwide pharmaceutical sales, which had been growing at 11%. For 2011, Merck Serono sales were €5.9 billion ($7.7 billion), up 3% from 2010, and total revenues for Merck Serono are expected to increase only slightly in 2012 and 2013.

When Merck announced the Serono acquisition in September 2006, then-CEO Michael Roemer said there were five goals the company needed to achieve to maintain an independent future: competitive scale in R&D; additional therapeutic areas focused on specialty markets; geographic reach into the U.S. market; geographic reach into Japan; and a strengthened oncology franchise.

At the time, he said the deal would fulfill the

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