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Merck 3Q Net Drops 28 Percent; To Cut 7,200 Jobs

By Pharmaceutical Processing | October 23, 2008

By LINDA A. JOHNSON AP Business Writer TRENTON, N.J. (AP) _ Drugmaker Merck & Co. said Wednesday it will slash 7,200 jobs as part of a new restructuring program that comes as its third-quarter profit plunged 28 percent, due to a hefty restructuring charge and flat sales. The maker of allergy and asthma treatment Singulair and cervical cancer vaccine Gardasil said it will cut nearly 13 percent of its work force, including many executives, to lower overhead and become more competitive, in its second major restructuring in less than three years. “It’s not a reaction to our performance in 2008 or the economy,” Chief Executive Richard Clark said in an interview. “I think it’s a competitive advantage” to make the company leaner and more flexible. Clark said 60 percent of the job cuts will come overseas — a higher rate than in the December 2005 restructuring just wrapping up — and cuts will affect workers in sales and marketing, manufacturing, administration and even research. He said spending on research, the company’s future, won’t be cut, but more will be shifted to basic-research collaborations at small companies and universities. Three basic research centers will be closed — in Seattle, Japan and Italy — and the company is still evaluating which manufacturing plants will be closed in a few years as it outsources more “non-core manufacturing.”In afternoon trading, Merck shares were down $1.08, or 3.6 percent, at $28.89. Whitehouse Station, N.J.-based Merck & Co. took a $612 million charge for restructuring, reducing net income for its third quarter to $1.09 billion, or 51 cents per share. That’s down from $1.53 billion, or 70 cents per share, a year earlier. The after-tax charge includes a $720 million pretax charge for the new restructuring program, much of it for severance costs, plus $127 million for the prior restructuring. Excluding the $612 million charge, equal to 29 cents per share, earnings per share would have been 80 cents, 1 cent better than Wall Street expected. “I don’t think it’s a stunner. I think it’s more of what you’ll see from all of these (pharmaceutical) companies,” David Heupel, pharmaceuticals portfolio manager at Thrivent Large Cap Growth Fund, said of the new restructuring. “They’re all looking for ways to grow their top line again but it certainly isn’t as easy as cutting costs.”The company narrowed its 2008 earnings forecast, to $3.28 to $3.32 per share excluding one-time items, from April’s forecast of $3.28 to $3.38. Despite a 4 percent boost from the favorable exchange rates, third-quarter revenue was down 2 percent at $5.9 billion. Analysts surveyed by Thomson Reuters were expecting $6.1 billion. Edward Jones analyst Linda Bannister said she was disappointed Merck reduced its often-repeated financial forecasts for the 2005-2010 time frame, such as dropping from double-digit growth in earnings per share over that period down to mid-to high-single digits. Revenue growth for the period also was reduced, from 4-6 percent annually to 2-4 percent. Sales were hurt by a further decline in Merck’s cholesterol franchise, lower sales for nearly all its vaccines and generic competition for former blockbuster osteoporosis drug Fosamax, which lost U.S. patent protection in February and saw sales cut in half this quarter to $354 million. Vaccine sales were down because of what Heupel called “disappointing” problems with manufacturing. Merck said several vaccines have been on back order because of nearly-resolved production problems. The cholesterol drugs Vytorin and Zetia, which Merck jointly markets with partner Schering-Plough Corp., saw sales dip about 15 percent to $1.1 billion in the quarter, cutting Merck’s income from the joint venture by 17 percent, to $400 million. Singulair sales edged up 1 percent, to $1.03 billion, and blood pressure drugs Cozaar and Hyzaar rose 9 percent to $888 million. Some new products, including HIV drug Isentress and diabetes drugs Januvia and Janumet, also sold well. The new restructuring program, which aims to eliminate the 7,200 jobs by the end of 2011, includes streamlining management layers by eliminating one in four senior and mid-level executives. Merck now has about 56,700 employees. A massive December 2005 restructuring, nearly complete, cut 10,400 jobs; between the two programs, Merck will have shed just over a quarter of its staff. The new cuts are expected to produce cumulative pretax savings of $3.8 billion to $4.2 billion from 2008 to 2013, but it will cost between $1.6 billion and $2 billion through the end of 2011. For the first nine months, net income jumped nearly 26 percent to $6.16 billion, or $2.86 per share, compared with $4.9 billion, or $2.24 per share, in the January-September period of 2007. Much of that improvement was due to one-time items this year, particularly a $2.2 billion gain related to Merck’s partnership with AstraZeneca LP. Sales for the first nine months were down about 1 percent, to $17.82 billion.

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