Updated from 2:57 p.m. ESTMerck ( MRK) 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.
Risks still "outweigh solid prospects," leading Scala to predict that Merck's stock will be weak for the next 12 to 18 months. His report says Scala or members of his research team or members of their households own Merck shares. His firm doesn't issue stock ratings, but it does and seeks to do business with companies covered in its research reports. About half of the 7,000 job cuts will be in the U.S. In addition to shedding five factories, Merck will reduce operations at other facilities, close a basic research site, and shutter two preclinical development sites. The sites will be closed by the end of 2008. Clark declined to say how many job cuts would come from manufacturing and how many would come from other divisions. He said the restructuring "does not indicate a decline in commitment to research." Clark said the restructuring was a response to increased competition, cost containment pressures and a desire to "enhance our competitiveness over the long-term." He was joined in a telephone conference call by Judy C. Lewent, the chief financial officer, and Willie A. Deese, president of Merck's manufacturing division. Clark was the manufacturing chief prior to being named CEO. Deese didn't immediately identify the facilities that would be closed or subject to reduced activity. He said executives will spend the next two days talking to employees at the affected plants. Lewent reiterated that the dividend is secure, even with the restructuring. "Cash flow production remains strong," and it "supports maintenance of the dividend at current levels," she said. Merck maintained its previous forecast for 2005 earnings of $2.47 to $2.51 a share, excluding the latest restructuring and other charges. Analysts surveyed by Thomson First Call were expecting an EPS of $2.50. The Whitehouse Station, N.J., drugmaker says its estimates exclude the establishment of any reserves for potential liabilities stemming from Vioxx lawsuits. The company previously set aside $675 million to cover the cost of litigation for the arthritis treatment and pain reliever that Merck pulled from the market in September 2004 amid concerns about cardiovascular risks.
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.
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.