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Merck Moves Fall Flat

The third Vioxx trial starts Tuesday in a federal courthouse in Houston. Merck lost a state-court case in Texas in August and won a state-court case in New Jersey in early November. As of Sept. 30, Merck said more than 6,400 U.S. lawsuits had been filed claiming Vioxx had caused an injury or a death.

For 2006, Merck expects to earn $2.28 to $2.36 a share, excluding restructuring charges, but including an expense of 7 cents for expensing stock options. The estimates exclude potential Vioxx liability reserves. The consensus forecast is $2.38 a share.

When calculated using generally accepted accounting principles, Merck predicts 2005 earnings of $2.04 to $2.10 and a 2006 profit of $1.98 to $2.12.

The company said its manufacturing overhaul should enable gross profit margins after 2008 to return to the level seen before the loss of Zocor's U.S. market exclusivity. The cholesterol drug, which has been losing patent protection in some foreign markets, will be hit by generics in the U.S. in June.

Zocor had $5.2 billion in worldwide sales last year. Merck expects sales to be $4.2 billion to $4.5 billion this year, before falling to $2.3 billion to $2.6 billion in 2006.

The New Plan

The new manufacturing plan will cost $350 million to $400 million this year and $800 million to $1 billion next year. Through the end of 2008, Merck sees cumulative pretax costs of $1.8 billion to $2.2 billion, with about70% being noncash expenses related to accelerated depreciation of the closed plants.

Barbara Ryan, of Deutsche Bank Securities, says the Merck restructuring appears to be less aggressive than the plan at Pfizer (PFE). She doesn't own shares, but her firm says it does and seeks to do business with companies mentioned in research reports.

Pfizer has said it wants to produce $4 billion in cost savings a year by 2008. Pfizer said it expects to save $400 million this year, $2 billion next year, $3.5 billion in 2007 and $4 billion in 2008. The cost of implementing the restructuring could be as much as $5 billion over four years.

Additionally, Pfizer has announced plans to shed six plants and several smaller facilities. Pfizer wants to cut by 25% the number of worldwide plants it has. The changes will lead to job losses, but Pfizer executives say they'll inform employees of specific reductions before they tell Wall Street.

Merck also cut its estimate of 2005 capital spending by $100 million to $1.4 billion and said expenditures will fall another $100 million next year. Total capital spending from 2005 to 2008 will likely be about $1.3 billion below the company's expectations for long-range capital spending at the end of 2004, Merck said. The new estimates are on top of a previously announced $600 million reduction.

One goal of the plan is to bring new drugs to market faster. The company will identify certain facilities "that will support production needs from late-phase clinical trials through the launch phase," trying to cut 12 to 15 months from the product-launch process.

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