Merck Schedules Big Shake-up

PHARMACEUTICALS BUSINESS

Merck & Co. will cut 7,000 jobs worldwide in the first phase of a global restructuring program aimed at reducing the company's cost structure, increasing efficiency, and enhancing competitiveness.

The company expects the initial phase to yield cumulative pretax savings of $3.5 billion to $4.0 billion from 2006 through 2010. Of the savings, about $2 billion will result from the implementation of a new supply strategy by Merck's manufacturing division. The company says it will create a global manufacturing network that is better aligned to current and future product demand.

Merck CEO Richard T. Clark told financial analysts last week that the need to restructure results from increased competition, cost containment pressures, and customer demand for value. However, problems specific to Merck cannot be denied. They include the recall of the arthritis and pain medication drug Vioxx in September 2004 and the pending loss of patent exclusivity on the firm's biggest selling drug, the cholesterol modifier Zocor.

The recall of Vioxx-a product that took in $2.5 billion in 2003, its last full year of sales-hurt the company's standing in the investment community: On the day of the recall announcement, Merck stock lost 27% of its value. The recall also has the potential to hit Merck's pocketbook, as more than 6,500 lawsuits have been filed against the firm. Merck eliminated some 4,500 employees in an earlier round of cost cutting that was completed in 2004.

As for Zocor, which loses patent protection in mid-2006, Merck is estimating sales next year to be between $2.3 billion and $2.6 billion, down from projected 2005 sales of between $4.2 billion and $4.5 billion.

The 7,000 positions, in manufacturing and other divisions, amount to 11% of the company's workforce. About half of the job cuts will be in the U.S. In addition, Merck will sell or close five of its 31 manufacturing facilities worldwide and will reduce operations at a number of its other sites. It will close one basic research facility and two preclinical development sites.

Thus far, of the five targeted plants, three have been identified-in Albany, Ga.; Riverside, Pa.; and Okazaki, Japan. In addition, Merck will close a lab in Okazaki and a distribution center in Tokyo next year. Merck will reduce employment by trimming 235 jobs at its plant near Montreal and about 330 employees in England; it also will cut the workforce at its landmark Rahway, N.J., site by 250.

In the future, Clark says, the company plans to pursue improved approaches to R&D, as well as marketing and sales. We are engaged in an ongoing effort to enhance efficiencies throughout the company and improve the way we discover, develop, manufacture, and market our medicines and vaccines, he says.

Merck says it will reconfigure its manufacturing operations to create a global network better aligned to current and expected product demand and enhance its relationships with external suppliers to leverage cost efficiencies while focusing resources on core activities.

The company also is implementing lean manufacturing practices to reduce production costs, inventories, and cycle time. And it is bringing together units from its manufacturing and R&D operations to create a new organization focused on accelerating the commercialization of drugs in its pipeline.

The restructuring will not be cheap. Merck estimates that the pretax costs of the plan will be $350 million to $400 million in 2005 and $800 million to $1 billion in 2006. Through the end of 2008, when the program is mostly complete, the cumulative pretax costs are expected to be somewhere between $1.8 billion and $2.2 billion.