Merck announces cost-savings plan with focus on manufacturing and 7,000 job cuts

By E. Janene Geiss

Philadelphia, Nov. 28 - Merck & Co. Inc. announced Monday the first phase of its global restructuring program designed to reduce costs, increase efficiencies and enhance competitiveness, including the immediate start of cuts to its manufacturing division.

Restructuring of the manufacturing, supply chain and research operations is meant to lower pretax costs by $3.5 billion to $4 billion through 2010. It includes eliminating 7,000 jobs, which represent 11% of Merck's work force, officials said in a company news release.

About 60% of the job reductions are in manufacturing. About $2 billion of restructuring savings through 2010 will result from the manufacturing-segment cuts, officials said.

By the end of 2008, Merck said it also plans to sell or close five of its 31 manufacturing sites worldwide and reduce operations at a number of other sites.

The company also said it expects to close one basic research site and two preclinical development sites. It said it plans to streamline manufacturing and outsource more of it and reduce supply costs.

The savings in manufacturing should enable Merck's gross margin beyond 2008 to return to levels consistent with those seen in the period prior to the loss of the patent for the cholesterol-drug Zocor, officials said.

"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 and ensure that we get them to patients who need them as quickly, safely and efficiently as possible," chief executive officer and president Richard T. Clark said in the release.

"Going forward, we also plan to pursue improved approaches to [research and development] and marketing and sales," Clark added.

Pretax restructuring costs are expected to be $350 million to $400 million in 2005 and $800 million to $1 billion in 2006, officials said. About 70% of the pretax costs are non-cash, relating primarily to accelerated depreciation for those facilities scheduled for closure.

As part of the strategy, Merck has decreased its global inventory level by $400 million relative to 2003 levels and further reductions are planned, officials said.

Capital expenditures of $1.4 billion are expected in 2005, a $100 million reduction from the $1.5 billion previously disclosed. Capital expenditures in 2006 are estimated to be $1.3 billion, officials said.

Merck said it anticipates 2005 earnings per share of $2.47 to $2.51, excluding the impact of net tax charges and the restructuring charges related to headcount reductions and site closures. Merck said it anticipates reported full-year 2005 earnings per share of $2.04 to $2.10.

For 2006, Merck said it anticipates earnings per share of $2.28 to $2.36, including the $0.07 impact of stock option expensing but excluding the restructuring charges related to site closure and position eliminations. Merck said it anticipates reported 2006 earnings per share of $1.98 to $2.12.

Based in Whitehouse Station, N.J., Merck is a research-driven pharmaceutical company.

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