Engineering News

Merck to cut 7,000 jobs, slash costs
Mon Nov 28, 2005 02:42 PM ET

Clark declined to predict when Merck would again post its traditional robust annual earnings growth, which has ranged in the high-single-digit and double-digit percentage range.

Tony Butler, an analyst with Lehman Brothers, said he expects the restructuring to be followed by broader Merck initiatives, including a possible narrowing of the company's research focus from dozens of diseases to perhaps as few as 12.

Merck, which has already struggled with patent expirations of other key drugs and ongoing litigation over the withdrawal last year of its Vioxx pain medicine, said the job cuts would reduce its work force 11 percent globally by 2008.

The moves are among the first by Clark, who took the helm of the Whitehouse Station, New Jersey-based company in May and pledged to increase cost-cutting efforts at Merck.

"It certainly looks like Clark is willing to make tough decisions," said A.G. Edwards analyst Albert Rauch. "I think eliminating 11 percent of the company is a big, major step for them. It will be really hard to maintain the corporate culture with so many positions being eliminated."

Merck saw $25 billion in market capitalization wiped away last year when it withdrew Vioxx from the market after determining long-term use of the drug increased the risk of heart attack and stroke.

The withdrawal of $2.5 billion-a-year Vioxx sparked thousands of lawsuits, increasing company costs at a time when Merck was facing stiff competition for its key medicines from cheaper generics.

About $2 billion of cost savings from the restructuring will result from a new supply strategy at its manufacturing division.

Merck sees about half of its planned job cuts in the United States and said it will also close one basic research site and two preclinical development sites by the end of 2008, subject to compliance with legal obligations.

The pretax costs of the restructuring are expected to be $350 million to $400 million in 2005 and $800 million to $1 billion in 2006.

The company forecast full-year 2005 earnings per share in a range of $2.47 to $2.51 excluding charges, and net earnings of between $2.04 and $2.10.

For 2006, Merck forecast a profit per share of $2.28 to $2.36, including about a 7 cent-per-share impact from stock option expensing but excluding restructuring charges. On a net basis, it sees a profit per share of $1.98 to $2.12.

Before the announcement, analysts, on average, were expecting the company to earn $2.50 per share in 2005 and $2.38 per share in 2006, excluding special items, according to Reuters Estimates.

Shares of Merck fell $1.39 to $29.59 on the New York Stock Exchange.

Source: Reuters

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