Embattled Merck To Cut Additional Jobs and Spending

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The New York Sun

TRENTON, N.J. – Pharmaceutical giant Merck & Company, under siege over revenues lost since it recalled arthritis drug Vioxx, will have cut about 5,100 jobs by year’s end, 700 more than first planned, and will slash costs by $2.4 billion over four years, the chairman and CEO, Raymond V. Gilmartin, said yesterday.


Mr. Gilmartin, speaking to about 250 analysts during Merck’s annual business briefing, said the company is accelerating changes to increase growth, but will stick with its strategy of shunning major mergers. Instead, it will seek new drug candidates through more licensing deals and internal research.


“Our focus now is on the future, on renewing the growth of the company,” Mr. Gilmartin said.


Mr. Gilmartin reaffirmed earnings guidance for this year and the next, saying Merck expects earnings per share of $2.59 to $2.64 for 2004 and $2.42 to $2.52 for 2005. Analysts surveyed by Thomson First Call were expecting $2.62 and $2.47, respectively.


In trading yesterday, Merck shares rose 57 cents, or 2 percent, to close at $29.62 on the New York Stock Exchange. They fell 7 cents in after-hours trading.


Merck’s 2004 forecast was reduced by 50 cents to 55 cents after it pulled Vioxx from the market worldwide on September 30 when its own study showed long-term use of the drug, which had annual sales of $2.5 billion, increased heart attack risk. Shares of the Whitehouse Station, N.J.-based company have since plunged from about $45, and it is beset by lawsuits. Merrill Lynch estimates Merck’s legal liability at up to $18 billion.


Merck’s general counsel, Kenneth C. Frazier, said 475 personal injury lawsuits, covering 1,100 plaintiffs, had been filed as of November 30, about 60% of them in state courts.He said the company’s strategy will be to try to move as many state cases as possible to federal courts, have the litigation initially coordinated by one federal judge, fight each case vigorously, and block any attempts at class-action lawsuits.


“We currently expect the first trial to occur in the first half of 2005,” Mr. Frazier said. “However, we expect these trials to continue for years.”


Various other lawsuits also have been filed, including at least 12 alleging the company misled investors and broke federal securities laws.


The 2005 earnings forecast does not include reserves to cover Vioxx litigation, Mr. Gilmartin noted.


The litigation’s impact will be the key to Merck’s future, said independent pharmaceuticals analyst Hemant Shah of HKS & Co. in Warren, N.J.


He said Merck’s situation is “not as dire as the stock suggests,” as it has several interesting experimental drugs in early testing, including ones for obesity, diabetes, stroke, and Alzheimer’s disease.


“If they are successful, Merck will be fine five years down the road and I think will be able to resume its growth,” Mr. Shah said.


Merck had announced a restructuring in October 2003, saying it would eliminate about 4,400 positions. Mr. Gilmartin said yesterday that with a total of 5,100 jobs cut, Merck would save $300 million on payroll and benefits next year.


Other planned savings through 2008 include $1.2 billion from procurement changes, $300 million from inventory reduction, $600 million from capital initiatives, and additional savings in manufacturing costs, partly from using plants’ flexibility to handle new products without hiring more workers.


“We are not operating under ‘business as usual’ in any sense,” Mr. Gilmartin said.


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