The restructuring of manufacturing, supply chain and research operations, meant to lower pretax costs by $3.5 billion to $4 billion through 2010, includes immediately starting to cut 11 percent of Merck's work force, with 60 percent of the reductions in manufacturing. The rest of the job cuts — the third round announced since October 2003 — are to be spread across the company, with about half in the United States.
By the end of 2008, Merck also plans to close one basic research site and two preclinical development sites, close or sell five of its 31 manufacturing plants and reduce operations at some others. It will also streamline manufacturing and outsource more of it, and reduce supply costs, with the latter effort expected to produce about half the savings.
Analysts said the move is part of an emerging trend in an industry that for years never had to worry about cutting costs, given gross profit margins well above 70 percent and limited pressure on prices until recently. Pfizer, Wyeth and a number of smaller companies have announced a restructuring and job cuts in the last year or so.
"This is in response to a very challenging environment," said Morgan Stanley managing director Jami Rubin. "I would expect broader cuts to be announced within the sales force, marketing, general and (administration) as well as R&D over the longer run."
In December, then-chief executive officer Raymond V. Gilmartin announced several similar changes aimed at cutting Merck's costs by $2.4 billion through 2008. Merck also eliminated 5,100 jobs through buyouts and layoffs in 2003-04 and an additional 825 this year.
Richard T. Clark, who took over as CEO in May, said Merck's revenue and legal troubles didn't play a role in his strategy, which is meant to create a more efficient, competitive business. Meanwhile, he said, the Whitehouse Station, N.J.-based company must maintain sales of its top drugs, launch new ones and better integrate late-stage research and manufacturing to reduce the time to launch new products.
"We need to execute flawlessly all of those ingredients in order to turn this around," Clark told The Associated Press in an interview.
Merck has slipped from the world's third biggest pharmaceutical company to No. 5, by revenue, in recent years. It is facing thousands of lawsuits and tens of billions of dollars in potential liability from its recalled painkiller Vioxx, a weak pipeline of new medicines and the loss of patent protection, in June, for its blockbuster cholesterol fighter Zocor.
Zocor now generates about 20 percent of Merck revenues and is the world's second-biggest drug. With coming competition from generic drug makers, Merck expects Zocor sales to drop to $2.3 billion to $2.6 billion in 2006, from $4.2 billion to $4.5 billion this year.
Tony Butler, senior pharmaceutical analyst with Lehman Brothers, said Vioxx, Zocor and an industry cost-cutting trend were behind the move.
"There's not a company that's not swept up in this wave of cost analysis," Butler said.
Henry L. Miller, a plaintiff's attorney from Newtown Square, Pa., who has two Vioxx cases pending, said it would be hard to draw a connection between that litigation and the restructuring, however.
"If every company the size of Merck that had lawsuits filed against it went out and started closing plants, nobody would be doing any business," Miller said.
The first federal Vioxx liability trial is to start in Houston on Tuesday. Merck has won once and lost once in state trials in New Jersey and Texas.
Merck employs just under 63,400 people, including about 8,000 in New Jersey, 15,000 in Pennsylvania and a total of 31,000 in the United States. Vacant jobs and ones held by temporary workers will be cut first and full-time workers will get severance packages, but no buyouts are planned, Clark said.
Willie A. Deese, head of Merck manufacturing, said the company won't name facilities being closed, sold or scaled back until workers are notified in the next couple of days. He said the new supply strategy will transform Merck's manufacturing and enhance shareholder value.
Merck shares fell $1.42 to close at $29.56 in heavy trading on the
New York Stock Exchange — down about two-thirds from its value five years ago.
Health care analyst Hemant Shah of HKS & Co. in Warren, N.J., said it's hard to tell if the reductions are the right size, because Merck still has to market existing drugs and new medications in what he called a "lackluster" pipeline. Medications in their final stages of development include drugs for insomnia, diabetes and nausea caused by chemotherapy, and vaccines for rotavirus, shingles and cervical cancer.
Restructuring costs from the changes are expected to total up to $2.2 billion through 2008, much of that through accelerated depreciation of closed facilities.
Further details are expected at Merck's Dec. 15 annual business briefing.
Merck reiterated its earnings-per-share forecasts of $2.04 to $2.10, including one-time charges, for 2005 and $1.98 to $2.12, with one-time charges, for 2006.
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