Pfizer (NYSE:PFE), Merck (NYSE:MRK) Going in Opposite Directions

With patents running and about to face generic competition over the next several years, CEOs at Pfizer and Merck have decided to go in different directions to deal with the challenge.

Pfizer CEO Ian Read announced he was going to slash the research budget of the company by 33 percent over the next two years, cutting it to a range of $6.5 billion to $7 billion.

For Merck, CEO Kenneth Frazier said today the company was going to spend from $8.1 billion to $8.5 billion in 2011 on research. He also dropped the long-term profit projection of the company based on the increase in research funding.

Frazier said on the conference call today, “I am not blind to what investors want us to do. They want us to invest in prudent ways, in ways that actually drive return on investment and productivity. But as a company we believe that the only sustainable strategy in the health-care environment that we’re in is real innovation that makes a difference to patients and payers.”

Of course what Frazier is doing is asking shareholders to pay for the higher research budget, which means downward pressure on the stock.

Removing the outlook for 2013 will be considered a negative by the market fro Merck as well, which should also pressure the share price of the company down.

For Pfizer, Read said the reduction in R&D shouldn't be considered a lack of commitment to the future, but rather a more focused approach for what is working best.

Read recently said, “We have to fix our innovative core, and that’s what this R&D change is about. The reductions are part of a plan to overhaul the company’s research operation to focus on the most- profitable programs.

“At some point your shareholders and stakeholders demand you have a return on investment in research. We’re looking at areas where we think it’s not a competitive advantage.”

This is interesting in that the companies are really test cases of two opposing ways of doing business, and we'll be able to watch which strategy wins out in the end.

Merck was trading at $32.79, down $1.03, or 3.03 percent, as of 1:36 PM EST. Pfizer was trading at $18.98, up $0.02, or 0.11 percent.