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Merck to Cut 11% of Staff, Close or Sell Five Plants:
7,000 Jobs to be Cut

BARBARA MARTINEZ / Wall Street Journal 28nov2005

[Mindfully.org note: Maybe they should hire cheerleaders as sales reps!]


In an effort to turn itself around, Merck & Co. announced a plan to cut its world-wide work force by 11%, close or sell five of its manufacturing facilities, and make the manufacturing of drugs more efficient.

The announcement marks the first major move by Richard Clark, who took over as chief executive of the Whitehouse Station, N.J., company in May. Merck called the cost-cutting plan the "first phase" of a restructuring program, though executives on a conference call wouldn't say how many phases would follow. Executives were short on other details, too, saying they would reveal more specifics when they meet with investors and analysts on Dec. 15.

The company is under pressure on a number of fronts, including rising competition from low-cost generic drugs and lawsuits related to a painkiller with safety problems. Merck's biggest-selling drug, cholesterol fighter Zocor, loses patent protection in the U.S. next year, threatening about $5 billion in annual revenue.

Last year, Merck withdrew the painkiller Vioxx from the market over safety issues, wiping out $2.5 billion in annual sales. Now it faces an unknown legal liability over Vioxx as it defends its actions in courtrooms across the country.

Meanwhile, the new drugs in Merck's pipeline don't have the potential to make up for the loss of Zocor, Vioxx and Fosamax, its second-biggest selling drug which will lose patent protection in 2008. The company's stock price is down 70% in the past five years.

Of the 7,000 positions that will be eliminated by the end of 2008, officials would only say that some were from the manufacturing division. Half of the cuts will come from facilities in countries outside the U.S., Merck said. Company officials on the call declined to specify whether some of the job cuts would come from eliminating sales representatives, though that is widely expected.

The restructuring announcement was not a big surprise, since in recent weeks Mr. Clark has been holding private meetings with Wall Street analysts saying that Merck's cost structure must change. In the private meetings, Mr. Clark, whose experience is mostly in Merck's manufacturing operations, has remarked about his admiration for the low-cost manufacturing process at computer maker Dell Inc.

Bernstein Investment Research and Management's pharmaceutical analyst Richard Evans was critical of Merck's restructuring plan. "At the end of the day, the only thing you've done is maintain the margin," he said on CNBC, "so this comes across as a game of defense not a game offense. It's not a transformational strategy. You're treading water."

Monday, Merck said its plan includes implementing a new supply strategy that is intended to create "a leaner, more cost-effective and customer-focused manufacturing model over the next three years." The goal is to reduce the time it takes from getting a customer order to manufacturing the product. Merck said it will "reconfigure" its manufacturing operations to create a global network that is "better aligned to current and anticipated future product demand."

The company said it intends to sell or close five of its 31 manufacturing facilities world-wide and to reduce operations at a number of other sites.

Merck said that a pilot program under way at Merck's manufacturing site in Puerto Rico to test this new manufacturing strategy has resulted in a "50% reduction in on-site cycle time and on-site inventory reduction of greater than 30%."

The company said it expects the first phase of its restructuring program to yield pretax savings of $3.5 billion to $4 billion from 2006 to 2010. Merck said that about $2 billion of those savings will result from the implementation of its new manufacturing supply strategy. The company said the savings in manufacturing "should enable Merck's gross margin beyond 2008" to return to the levels of those seen in the period prior to the loss of U.S. market exclusivity for Zocor.

Merck said the pretax costs of its restructuring plan are expected to be $350 million to $400 million in 2005 and $800 million to $1 billion in 2006. Through the end of 2008, the cumulative pretax costs are expected to range from $1.8 billion to $2.2 billion.

Merck lowered its outlook for 2005 earnings, saying it now expects a profit of $2.04 a share to $2.10 a share, down from its October forecast for $2.18 a share to $2.22 a share. For 2004, Merck earned $2.61 a share. The forecast for earnings excluding items remains unchanged at $2.47 a share to $2.51 a share. Analysts, on average, predict full-year earnings of $2.50 a share, according to Thomson First Call. Mean analysts' estimates typically exclude unusual items.

For 2006, the company forecast earnings per share of $2.28 to $2.36, including expensing for stock options but excluding restructuring charges, or $1.98 to $2.12 with one-time charges. Analysts surveyed by Thomson Financial expected earnings per share of $2.38 in 2006.

In midday trading on the New York Stock Exchange, Merck shares were off $1.25, or 4%, at $29.73.

Merck, Under Pressure, Will Cut Jobs and Close Plants

ALEX BERENSON and VIKAS BAJAJ / New York Times 28nov2005


Merck, under pressure from investors and analysts to reduce costs, said today it would cut 7,000 jobs in the next three years and close five manufacturing plants. The company also told analysts to expect further restructuring.

In a much anticipated announcement, Richard T. Clark, who became Merck's chief executive in May and promised investors big changes, said the company would streamline its operations, particularly how it makes and distributes drugs and vaccines. Mr. Clark also said the company was looking at changes to its research and development and marketing and sales activities and would provide more details at Merck's annual meeting with analysts on Dec. 15.

The company says the actions it announced today, which include an 11 percent reduction in its global staff of 62,000 by the end of 2008, would save it $3.5 billion to $4 billion before taxes in the next five years. In addition to closing 5 of its 31 drug-making plants, Merck, which is based in Whitehouse, N.J., will also shut down a basic research site and two pre-clinical development sites.

All told, the restructuring itself will cost the company $1.8 billion to $2.2 billion by the end of 2008. Merck projected that its earnings would range between $1.98 a share and $2.12 a share in 2006, compared to $2.04 a share to $2.10 a share this year.

Shares of Merck opened down 17 cents, to $30.80, this morning on the New York Stock Exchange.

The company is reducing costs enough to match its falling sales, which are under pressure because of competition with generic pharmaceuticals and the withdrawal of the best-selling painkiller Vioxx, said Richard Evans, an analyst at Sanford Bernstein. But he added that the company has, so far, not said what it was doing to increase drug sales and rein in rising expenses for marketing and sales.

"This is not an alternative business model, this is not a brave new day," Mr. Evans said. "This is good old-fashioned defense. This is a defensive management of a business in decline."

Mr. Clark, who has spent his career at Merck and is known as a cost cutter, had already been quietly trimming the company's work force. In the third quarter, the company said it spent $80 million on "ongoing global position eliminations."

"The plans we are announcing today will help us effectively address the challenges that Merck faces today and in the future," Mr. Clark said in a conference call with financial analysts.

The changes announced today are aimed at improving how the company manufactures drugs and vaccines. The company said it wanted to reduce the amount of time it takes to make the initial supplies of new drugs and develop the techniques needed to manufacture them by 12 to 15 months. The company said it had streamlined manufacturing at some plants, reducing inventory, producing drugs faster and lowering costs.

For nearly a month, message boards used by drug industry sales representatives have been rife with rumors that Merck, the third-largest drug maker, was on the verge of announcing cuts of as much as 20 percent of its sales force.

On Saturday, The Wall Street Journal reported that Merck had briefed its board on the final details of its planned cuts, including several plant closings.

Merck has been battered by falling sales and profits and thousands of lawsuits over Vioxx, a painkiller that the company stopped selling in 2004 after a clinical trial linked it to heart attacks and strokes. The company will face more problems in 2006, when Zocor, a cholesterol drug that is its biggest-selling and most profitable medicine, loses its patent protection and will be open to competition from much cheaper generic copies.

Shares of Merck have fallen more than 30 percent since the company withdrew Vioxx, although they have risen slightly since early November, when the company won the second personal-injury lawsuit over the drug to reach trial. On Friday, Merck closed at $30.98, up 17 cents.

In the first nine months of this year, Merck's sales fell about 5.5 percent, compared with its 2004 sales figures. Its profits declined 12 percent, excluding a one-time charge.

source: http://www.nytimes.com/2005/11/28/business/28cnd-merck.html?hp&ex=1133240400&en=189c7163839ea019&ei=5094&partner=homepage 28nov2005

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