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Merck Moves Fall Flat

Updated from 2:57 p.m. EST

Merck (MRK - Get Report) said Monday it will cut 7,000 jobs, or 11% of its workforce, and close or sell five of 31 manufacturing plants over the next three years as part of a sweeping restructuring.

"The actions we are announcing today are an important first step in positioning Merck to meet the challenges the company faces now and in the future," said Richard T. Clark, who replaced Raymond V. Gilmartin as CEO in May. "Going forward, we also plan to pursue improved approaches to R&D, and marketing and sales." Details will be unveiled Dec. 15.

Merck, whose stock is down 38% since the start of 2003 on concerns about patent expirations and the uncertain impact of the Vioxx litigation, expects the program to create cost savings of $3.5 billion to $4 billion over the next five years. A significant portion of the savings will come from a new manufacturing supply strategy.

Investors were disappointed, which analysts suggested reflects Merck's failure to outline new drug innovations or solid plans to expand profits.

By the 4 p.m. EST close of trading, the stock had fallen $1.42, or 4.6%, to $29.56. Nearly 26 million shares changed hands, almost three times the average daily volume for the last three months of 9.4 million shares.

"While manufacturing is important, perhaps more critical is the generation and commercialization of new products," says Tim Anderson, of Prudential Equity Group, in a Monday report to clients.

"Merck is likely to remain a cash-rich, but earnings poor, company for the next many years even with restructuring," says Anderson, who is neutral on the stock. He doesn't own shares, and his firm doesn't have an investment banking relationship.

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The restructuring plan "doesn't add much visibility" to sales and earnings growth prospects, adds Steve Scala, of S.G. Cowen & Co., in a research report. He says earnings per share will likely decline through 2008.
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