Merck said Monday it will cut 7,000 jobs and close five plants worldwide, the biggest layoff in its history and a sign of deepening retrenchment...
PHILADELPHIA — Merck said Monday it will cut 7,000 jobs and close five plants worldwide, 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 between $3.5 billion and $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 would not say whether any of the 300 employees at its Seattle unit, Rosetta Inpharmatics, would be affected by the job cuts. Spokeswoman Janet Skidmore said the company wants to notify its employees before making specific restructuring information public.
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Merck purchased Rosetta, a leader in bioinformatics, for $620 million in 2001.
The direct reasons given for the move were Merck’s expected loss next year of $2 billion in patent-protected sales of its blockbuster cholesterol drug Zocor and legal costs surrounding its recalled pain reliever Vioxx.
Many major drugmakers, however, also are struggling with a dearth of new products lucrative enough to sustain the corporate behemoths and with a federal regulatory crackdown spawned, in part, by Merck’s debacle with Vioxx last year.
“For us, it’s a gigantic first step,” Merck Chief Executive Richard Clark, appointed six months ago, said in an interview.
Adding that broader strategic changes were in store, Clark said: “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 the sixth-biggest drugmaker as measured by worldwide sales, down from No. 1 a decade ago, according to the research firm Datamonitor.
Merck officials said 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 overall 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 preclinical 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, released a separate statement saying one of the plants is in Kirkland, Quebec, and layoffs would affect 235 employees across Canada.
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 opposes.
“We are continuing to look at targeted acquisitions of companies that would enhance our in-line revenue,” Clark said in the interview. “It’s not about Big Pharma mergers, but a company that has research alignments around our kinds of franchises.”
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, Clark said, himself a veteran of the manufacturing division.
Merck said it expects to lose about $2 billion in revenues 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 franchise withdrawn in September 2004 after a study linked it to increased cardiovascular risk.
The company has won one Vioxx product-liability case and lost another in state courts, with its first federal case beginning Tuesday in Houston. The company has set aside $675 million for legal bills but nothing for liability, which Wall Street analysts have projected at between $5 billion and $30 billion.
The long-expected cuts got a dismal review on Wall Street, where Merck’s stock price had risen in recent weeks in anticipation of larger cuts. Merck shares closed down $1.42, or 4.5 percent, to $29.56.
Merck is not alone. New York-based Pfizer earlier this year announced $4 billion in cost cuts by 2008 and its stock is down. Madison, N.J.-based Wyeth and London-based GlaxoSmithKline PLC have made cuts in sales forces.
According to global recruiting firm Challenger, Gray & Christmas, the Merck announcement increases the number of announced layoffs so far this year in the pharmaceutical industry by 150 percent over the same period a year ago, to at least 24,396.
Merck has a number of promising products in its development pipeline, including cervical-cancer vaccine Gardasil. But analysts say those revenues may not rise quickly or high enough to offset the cost of losing Vioxx, Zocor and its osteoporosis drug Fosamax in 2008.
“This is half the savings that Pfizer achieved with its recently announced program,” pharmaceutical equity analyst Catherine Arnold, of Credit Suisse First Boston, said in a note to investors.
Timothy Anderson, of Prudential Equity Group, wrote that the projected savings fell short of expectations and may signal a time to sell.
“It may be wise to take profits on the news,” Anderson wrote.
Information on Rosetta provided by Seattle Times biotechnology reporter Ben Romano.