Merck & Co has announced details of its global restructuring programme, a source of much speculation over the weekend and early yesterday, revealing that it will lay off around 7,000 workers, 11% of its entire workforce, by the end of 2008.
The drugmaker will also shut down or sell five of its 31 production plants in a bid to slice $3.5 to $4 billion dollars from its costs from 2006 to 2010.
The move is just the latest cost-cutting exercise by a Big Pharma company. Pfizer, roughly twice Merck’s size, announced a programme to save $4 billion a year by 2008 earlier this year.
Once the pharmaceutical industry’s biggest company, Merck has seen itself slip down the rankings in recent years as it shunned the mega-mergers favoured by many of its peers. But the company said catalyst for the latest round of restructuring is the forthcoming patent expiration in the USA for cholesterol-lowering drug Zocor (simvastatin) in the middle of next year, which will cut profits by 4.4% for 2006 as a whole. Last month, the drugmaker announced that it would cut 825 jobs worldwide after reporting a 2% drop in third-quarter revenues.
Although already expired in other markets, Zocor is still a big earner for Merck in the USA, where it brought in third-quarter sales of $770 million. But turnover of the drug is expected to plummet once generic forms of the drug become available. Meanwhile, the company is also facing a plethora of lawsuits from people alleging damage by its now-withdrawn painkiller Vioxx (rofecoxib), which some analysts fear could cost the group up to $50 billion, and suffering from the loss of revenue from a product making $2.5 billion a year before it was pulled.
The restructuring had been widely anticipated after the appointment of new chief executive Richard Clark, who replaced former CEO Raymond Gilmartin in May.
Manufacturing to be hit hard
Like Pfizer, Merck is looking to save a large proportion of its costs from the manufacturing functions, lending credence to those who insist the pharma industry has been too slow to modernise its production processes.
The trimming down of manufacturing at Merck will account for around $2 billion of the expected cost savings, and the company said this should enable its gross margin beyond 2008 to return to levels consistent with those seen in the period prior to the loss of US market exclusivity for Zocor.
About half of job losses will come from Merck’s US operations, with the remainder in other countries. Along with the sale or closure of five manufacturing units, the company also plans to reduce operations at a number of other sites and adopt ‘lean manufacturing’ principles that should boost efficiency by cutting process development time by a year or more, shorten cycle time and reduce the amount of inventory the drugmaker needs to store in half.
Also facing the chop are one basic research site and two preclinical development facilities. All the marked sites will be closed by the end of 2008, said Merck. Meanwhile, a new ‘commercialisation’ group will bring together elements of manufacturing and R&D to shorten the time it takes to deliver new drugs from Merck’s pipeline, mainly be shortening clinical trial cycle times.
The pretax costs of the restructuring are expected to be $350 to $400 million in 2005 and $800 million to $1 billion next year. The cumulative pretax costs of this initial phase of restructuring activities are expected to be in the $1.8-$2.2 billion range by the end of 2008.