Merck's restructuring initiative costs dearly

By Gregory Roumeliotis

- Last updated on GMT

Related tags Merck Merck & co. Merck & co

Drug giant Merck & Co has seen flat sales and a rise in
operating costs in the first quarter of 2006, as its restructuring
initiative, which contract manufacturers welcomed, takes its toll
on the company.

The second-biggest drugmaker in the US reported an operating profit of $1.366bn (€1.097bn), hardly rising from $1.631bn in Q4 of 2005, as sales barely went up 1 per cent to $5.410bn.

Crucially, restructuring costs wiped out $303.7m of Merck's earnings and curbed profit margins by 5 per cent.

These costs are associated with a global restructuring programme the firm announced in November which will result in the closure or divestment of five of its 31 manufacturing plants and the loss of 7,000 positions in manufacturing and other divisions by the end of 2008, representing about 11 per cent of its global work force.

Driving this cost-saving scheme is the company's need to maintain its profitability as it faces stiff competition from generic drug firms, its product pipeline dries up and legal bills for Vioxx, the inflammatory drug withdrawn in 2004, are piling in, as lawsuits climbed last month to 11,500.

Merk said 1,800 jobs had been eliminated during Q1, and another 1,100 in the last quarter of 2005.

The company is also implementing a pilot program at its pharmaceutical manufacturing site in Arecibo, Puerto Rico, where it is aiming for a 50 per cent reduction in on-site cycle time and an on-site inventory reduction of greater than 30 per cent.

Nevertheless, to motivate existing employees, the company spent $98m in stock options, only $11m of which was in manufacturing.

"Regular, full-time and part-time employees of Merck are eligible for the company's incentive stock option plan,"​ Merck spokeswoman Amy Rose told​.

"Merck has announced as part of its global restructuring programme a new supply strategy that will create a global facility network that, among other things, combines the best of Merck manufacturing with the manufacturing capabilities of key external suppliers."

Contract manufacturers are positioning to do business with Merck, which is looking to find savings of $3.5bn to $4bn over five years.

In its latest quarterly results the company managed to show an increase of 11 percent in its bottom line to $1.52bn, but only thanks to a drop in the taxes it paid and a positive contribution from financials, not as a result of operations.

Thus, apart from trying to cut costs, Merck needs ways of becoming more profitable and has said it is actively seeking to acquire new drugs to bolster its product line.

Although the company saw an 8 per cent jump in US sales to $3.247bn, it suffered a slump in foreign sales of 8 per cent to $2.163bn.

Zocor, its biggest seller with $1.063bn revenue in Q1 of 2006, is losing patent protection in June, which is expected to trigger a plunge in sales.

The patent of Merk's other blockbuster, Fosamax, an osteoporosis drug, will also expire in 2008.

Despite the company expecting sales of $3.3bn to $3.6bn in 2006 for its asthma treatment Singulair, and a strong performance from drugs such as its newer cholesterol treatments Zetia and Vytorin, for now Merck can only look to savings achieved by streamlining operations to make up for the loss caused by genericisation.

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