Merck to cut 7,000 jobs by 2008

Drugmaker plans to close five plants

November 29, 2005|By KNIGHT RIDDER/TRIBUNE

PHILADELPHIA -- Merck & Co. Inc. said yesterday that it would cut 7,000 jobs and close five plants worldwide by 2008, the biggest layoff in its history and a sign of deepening retrenchment across the drug industry.

The closings and job cuts, amounting to 11 percent of its nearly 63,000 employees, are expected to save Merck $3.5 billion to $4 billion between 2006 and 2010, or about 5 percent of its estimated expenses.

The reduction fell short of Wall Street expectations, but executives emphasized it was just the first phase of a cost-cutting plan that also includes restructuring the marketing and research divisions.

Merck blamed the move on its expected loss next year of $2 billion in patent-protected sales of its cholesterol drug Zocor and legal costs surrounding its recalled pain-reliever Vioxx.

Many major drugmakers are struggling with a dearth of new products lucrative enough to sustain the corporate behemoths. They also are facing a federal regulatory crackdown spawned, in part, by the Vioxx debacle last year.

"For us, it's a gigantic first step," said Merck chief executive Richard T. Clark, who was appointed six months ago.

He said the fate of the company hinges more on developing new products than on cost savings. "You need to continue to work on your cost element. But you're not going to save your way to growth. You need to develop products."

Merck, with global revenues of $21 billion and net income of $5.8 billion last year, is now the sixth-biggest drugmaker as measured by worldwide sales, down from No. 1 a decade ago, according to the research firm Datamonitor PLC.

Merck officials would say only that half the 7,000 layoffs would come in the United States. It will be Merck's biggest reduction since cutting 5,100 jobs worldwide in 2003-2004 and the largest in its 114-year corporate history.

"Morale is very low," said Bruce Fickert, union president representing about 1,800 unionized workers in West Point, Pa. "The company has never been in this position before. But we feel it's still a good company to work for and we'll get through it."

The cuts will entail closing at least one basic research site, two pre-clinical sites, where research is done on animals before testing in people, and shuttering or selling five of the company's 31 manufacturing plants worldwide, all by 2008.

Merck officials declined to identify the five plants until all workers have been notified.

Merck's Canadian subsidiary, Merck Frosst Ltd., said separately that layoffs would affect 125 people at one plant in Kirkland, Quebec, and 125 others in marketing and research at other locations, including Montreal.

Flush with at least $5 billion cash but short of revenue growth, Merck will step up its search for acquisitions of smaller drug companies while resisting mergers with other pharmaceutical giants, which Clark said he op- poses.

"We are continuing to look at targeted acquisitions of companies that would enhance our in-line revenue," he said.

"It's not about Big Pharma mergers, but a company that has research alignments around our kinds of franchises," Clark said.

The plan also includes restructuring the manufacturing division, including farming out some of the work of its 15,000 employees to other companies worldwide.

At the same time, Merck's manufacturing division will create a new "commercialization organization" to work with Merck's research labs to try to shave 12 to 15 months off the time it takes to bring a compound into full production, Merck's chief executive said.

Merck said it expects to lose about $2 billion in revenue next year when it loses patent protection on its top-seller Zocor, which this year is expected to generate at least $4.2 billion in sales.

Merck also is in the midst of defending itself against at least 6,400 lawsuits over Vioxx, a $2.5 billion painkiller withdrawn in September 2004 after a study linked it to increased cardiovascular risk.

The company so far has won one Vioxx product-liability case and lost another in state courts, with its first federal case beginning today in Houston.

The company has set aside $675 million for legal bills but nothing for liability, which Wall Street analysts have projected at $5 billion to $30 billion.

The long-expected cutbacks got a dismal review on Wall Street, where Merck's stock price had risen in recent weeks in anticipation of larger cuts. Merck shares fell $1.42, or 4.5 percent, to close at $29.56.

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