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Merck cutting jobs, plants
Drugmaker to eliminate 7,000 positions, close or sell 5 manufacturing plants in restructuring.
December 8, 2005: 2:23 PM EST
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Beset by legal attacks and facing the loss of a key money maker, Merck & Co. Monday unveiled a dramatic cost cutting program, letting go about 11 percent of its staff worldwide and shedding five of its manufacturing plants.

The moves are expected to save the company up to $4 billion and speed up its product cycle by at least one year, company executives said.

Wall Street, however, was unimpressed with the announcement. The company's stock price (Research) dropped nearly 4 percent on the news.

"It's not aggressive enough to get this company in a growth mode," said Barbara Ryan, analyst for Deutsche Bank North America. "It is not doing anything to improve the current earnings outlook for Merck ... I just think there needs to be more of a fundamental overhaul of the business."

About half of the 7,000 job cuts will come in the United States. The company, the nation's No. 2 drugmaker behind Pfizer in terms of prescription drug sales, did not immediately identify which of its 31 worldwide plants are subject to sale or closure. Merck would not say how many of the current plants are in the United States, but the plants are in 25 different nations, meaning that no more than seven are in the United States.

In addition, Merck said it would reduce operations at a number of other sites, including closing one basic research site and two preclinical development sites. The closings, sales or cutbacks, will take place by the end of 2008 and are the initial phase of a broader cost reduction program, said Merck.

"We're still not making any statements about where that 7,000 (in job cuts) is," said Willie Deese, president of Merck's manufacturing division.

The cutbacks, Deese said during a Web cast, will take "waste and duplication out of our operations" and cut 12 to 15 months from the time it takes to develop and launch a new drug. That shortened cycle will put the company "on par with leading manufacturers around the world," he claimed.

Merck announced the job cuts as the company faces at least 6,500 lawsuits related to Vioxx, the arthritis painkiller the company pulled off the market in 2004 because of a study showing increased heart attacks in patients. Jury selection begins in the third Vioxx trial on Tuesday.

The company is also bracing itself for the June 2006 patent expiration of Zocor, a cholesterol-reducing statin. Zocor sales totaled $5.2 billion in 2004 sales, the most recent year for an annual sales total. Judy Lewent, Merck's executive vice president and chief financial officer, projected that Zocor sales will total $2.3 billion to $2.6 billion in 2006, its last year as a branded product.

Lewent said the company "continues to aggressively seek out opportunities through external collaboration," meaning that it seeks to build up its pipeline by buying smaller companies with experimental drugs in the late stages of development. Also, Deese said the company may expand its capacity at a vaccine facility in Durham, N.C.

Merck's projected savings

The overall cost reduction program is expected to save the company between $3.5 billion to $4 billion on a pre-tax basis in the 2006 to 2010 period, according to Merck. Restructuring charges from the closings are expected to be $350 million to $400 million in 2005 and $800 million to $1 billion in 2006, on a pretax basis. Merck said all restructuring costs from this first phase will be completed by 2008.

While Merck maintained its 2005 earnings guidance, it said it expected to once again see lower 2006 earnings that would fall short of current forecasts. That excludes the cumulative pretax restructuring charge the company expects to be between $1.8 billion to $2.2 billion. But the new guidance does include a 7-cent-a-share impact from stock option expensing.

The company said in 2006 that it expects to earn between $2.28 to $2.36 a share, excluding special items. A survey of analysts by earnings tracker First Call had a consensus earnings forecast of $2.38 a share, with a range of estimates between $2.24 to $2.50.

The company repeated its earlier 2005 guidance of EPS between $2.47 to $2.51 this year, excluding special charges. It said it should report EPS between $2.04 to $2.10 including those charges.

First Call's forecast called for EPS of $2.50 this year, excluding special items, down from $2.62 a share on that basis in 2004. The company's earnings were $2.92 a share in 2003, before the Vioxx problems started hitting results.

The cost cutting plans are the first major move of CEO Richard Clark, who was named to the top post in May, replacing Raymond Gilmartin, who had led the company when it was hit with the Vioxx problems. Clark had previously been president of Merck's manufacturing operations, the job new held by Deese.

Clark said that the restructuring plan is Merck's "important first step" in creating "a leaner, more cost-effective, customer-focused market model." Clark said the restructuring will "enable us to deliver the next generation of vaccines and medicines faster and more efficiently."

To read about Merck's third quarter earnings, click here.

Ryan does not own Merck stock but her firm, Deutsche Bank North America, does own stock in the company.

CNNMoney.com's Chris Isidore, contributed to this report.  Top of page

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