Merck Revamps R&D Unit in Pursuit of New Opportunities

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Big pharma is betting that the next big drug discovery may actually be found outside the walls of their respective R&D labs.

Merck  (NYSE: MRK  ) is currently overhauling its R&D unit and plans on creating "international innovation hubs" to gain access to drug research being performed outside the company's labs. The Wall Street Journal obtained information from people familiar with the plan, who explained that the hubs would be located in areas already buzzing with academic and commercial research. These areas include cities like Boston, San Francisco, London, and Shanghai.

The hubs would seek out licensing and acquisition opportunities for Merck in biotech and pharmaceutical research. Closer to home, the company is streamlining its own research pipeline and plans to sell off some new formulations that Merck's researchers have identified. Some of the compounds are related to experimental glaucoma treatments, antipsychotics, and a male fertility drug, according to an internal company document obtained by the Journal.

Merck's R&D unit changes focus to stay competitive
Merck's new R&D chief, Roger Perlmutter, spoke in an October conference call with analysts about his support of greater collaboration with outside researchers to build up the company's drug pipeline. This has led to reductions in personnel within Merck's own R&D unit, as the company works on improving operating efficiency. Inside the R&D unit more attention is being paid on medicines that will deliver a high return on investment.

Merck has struggled to bring new drugs to market in recent years, since the company has traditionally handled a new drug's product lifecycle entirely in-house, from initial discovery to clinical trials. The company's bottom line has also struggled with the effects of patent expirations on drugs such as asthma and allergy therapy Singulair. Sales of Singular dropped to $280 million in fiscal 2013's third quarter from $602 million in the same period in 2012.

Since 2009, competitors like Pfizer (NYSE: PFE  ) and Johnson & Johnson (NYSE: JNJ  ) have outpaced Merck in the acquisition of partners to advance their respective drug pipelines. In fact, Merck's decision to create innovation hubs mirrors Pfizer's and Johnson & Johnson's own plans to set up regional offices to identify external research opportunities .

Regional hubs used to identify promising research in the early stages
According to the company's website, Pfizer launched its Centers for Therapeutic Innovation, or CTI, to "...bridge the gap between early scientific discovery and its translation into new medicines." Launched in 2010, the centers enable Pfizer scientists to work alongside academic researchers. Each side provides their unique expertise to create a more novel approach that aims at speeding up the drug development process. So far, four locations have been set up in Boston, New York, San Diego, and San Francisco. CTI's network of partners has more than 23 academic centers and a portfolio of 25 projects.

Johnson & Johnson's innovation centers work with university scientists and entrepreneurs, start-up biotech firms, and academic institutes. The company goal is to identify and invest in health care solutions for its three business segments -- consumer, pharmaceutical, and medical devices and diagnostics. The centers are located in California, Boston, London, and Shanghai. In December, the company announced that additional London offices would open in several U.K. life science centers. The locations will serve as extensions of the London Innovation Center, which works with academics and entrepreneurs throughout the U.K.

Johnson & Johnson has also created on online idea submission process, called Intelli-Ideas. Anyone with a consumer products idea that is patented or patent pending and wishes to partner with J&J can submit their idea through the company's website.

My Foolish conclusion
The move by Merck to partner with R&D innovators outside its own company shows the need for greater efficiency in the drug development process. By tapping into outside research, the company can rein in its internal R&D staff to focus on the most promising drugs that will increase the company's ROI on research. If the use of regional offices to identify cutting-edge research leads to the development of more successful drug therapies, this new approach may improve and speed up the product lifecycle for commercial medicines.

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