Pharmaceutical Giant Merck to Cut Thousands of Jobs

In an announcement that was anticipated by Wall Street analysts, embattled drugmaker Merck & Co. announced Monday that it will launch a new reorganization effort meant to save up to $4 billion by 2010. The first phase of that reorganization will be to eliminate approximately 7,000 jobs—11% of the company’s total workforce—and close or sell five manufacturing plants.

The announcement comes as no surprise because Merck is facing thousands of lawsuits amounting to billions of dollars in liability due to its recall of the painkiller Vioxx. Now the company is also facing the loss of its exclusive patent for the cholesterol drug Zocor, the second most popular medication in the pharmaceutical industry worldwide. Zocor generates about 20% of Merck’s total revenues, and because competition from generic drug makers is just around the corner, Merck expects sales of Zocor to drop from nearly $4.5 billion this year to only about $2.5 billion next year. In recent years the company has slowly dropped from its status as the world’s third largest pharmaceutical company to the fifth.

Based in Whitehouse Station, NJ, Merck also said it will revamp its supply chain and outsource some of its manufacturing processes. The cuts scheduled to take place over the next two years will target U.S. operations, and are intended to increase efficiency, reduce costs, and increase competitiveness. "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, Merck's chief executive officer and president, told analysts during a morning conference call. "We believe they will improve our earnings-per-share and ultimately enhance our shareholder value."

Merck has 31 manufacturing plants, but did not identify which of the plants will be sold or closed. Operations at several other plants will be reduced or revamped. Willie A. Deese, head of Merck manufacturing, said that the sites will not be named until after "employees at the sites that are expected to leave our networks are advised at a series of local meetings." The company employs almost 63,000 people, half of whom are located in the United States. Last month Merck cut 825 jobs worldwide.

Merck’s stock price has dropped by over 60% in the last five years. However, analysts believe Merck has enough savings to offset some of the decline caused by the competition from generic Zocor on the horizon, but the company still has to market existing drugs and new medications in their final stages of development—drugs for insomnia, diabetes, and nausea caused by chemotherapy, as well as vaccines for shingles, rotavirus, and cervical cancer.

Costs for restructuring are expected to be nearly $400 million in 2005 and over $800 million in 2006. The result is expected to be a pretax savings of $3.5 billion to $4 billion from 2006 through 2010. Further details of the restructuring will be revealed on December 15, during the annual business meeting for analysts. Meanwhile, the first federal Vioxx liability trial begins Tuesday in Houston. Merck has lost once and won once in two state liability trials, but thousands more trails are on the horizon and analysts predict that the company’s total liability could be nearly $50 billion. Merck’s restructuring plans do not include any costs related to Vioxx and Monday’s announcement does not mention a reserve set up to cover Vioxx liability. One analyst applauded the company’s decision not to estimate their liability. "The minute you say that, then you’re telling the whole world what you’re willing to pay," the analyst said.