Merck (MRK) Restructures, Cuts 8,500 Positions

NEW YORK (TheStreet) -- Merck  (MRK) is firing 8,500 workers and implementing other cost-cutting measures in a restructuring effort to focus more heavily on its commercial and research and development operations.

"These actions will make Merck a more competitive company, better positioned to drive innovation and to more effectively commercialize medicines and vaccines," Merck CEO Ken Frazier said in a statement.

The New Jersey-based drugmaker seeks to reduce operating expenses by $2.5 billion by the end of 2015. The 8,500 job cuts announced Tuesday, added to previously announced layoffs of 7,500 employees, will decrease Merck's total workforce by 20%.

Merck expects 40%, or $1 billion, of the savings to be realized by end-2014. The restructuring efforts will cost between $2.5 billion $3 billion, two-thirds of which will be cash outlays associated with separation expenses.

"While these actions are essential to ensure that Merck can continue to fulfill its mission into the future, they are nevertheless difficult decisions because they affect our dedicated and talented colleagues. We appreciate the contributions of all our employees, and we will support them during this time of transformation," said Frazier.

Merck restated its full-year 2013 non-GAAP earnings per share guidance of $3.45 to $3.55 a share.

On the R&D front, Merck said it will focus drug development efforts on a few key therapeutic areas, including diabetes, acute hospital care, vaccines and oncology. Merck said it will also step up efforts to bring in new drugs from outside companies through licensing and acquisitions.

Goldman Sachs revised its price target on the announcement to $54 from $52 but maintained its hold rating.

Merck shares closed 2.38% higher to $48.74. Shares led the S&P 500 which was up 0.8%.

TheStreet Ratings team rates Merck & Co as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate Merck & Co (MRK) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, expanding profit margins and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The current debt-to-equity ratio, 0.59, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.41, which illustrates the ability to avoid short-term cash problems.
  • The gross profit margin for Merck & Co is currently very high, coming in at 79.48%. Regardless of MRK's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, MRK's net profit margin of 8.22% is significantly lower than the industry average.
  • Merck & Co's earnings per share declined by 48.3% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, Merck & Co reported lower earnings of $2 vs. $2.03 in the prior year. This year, the market expects an improvement in earnings ($3.48 vs. $2).
  • MRK, with its decline in revenue, underperformed when compared the industry average of 3.9%. Since the same quarter one year prior, revenues fell by 10.6%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

Written by Keris Alison Lahiff.