Merck Will Lay Off 7,000 and Close Five Plants

December 6, 2005

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-12-06-2005, Volume 0, Issue 0

The embattled pharma company needs to walk a tightrope between reassuring employees and pleasing investors. Can it succeed? Analysts and personnel experts share their insights.

Merck & Co. Inc. announced what experts are calling a long overdue restructuring strategy Nov. 28. The plan includes laying off 11 percent of its workforce, predominately in manufacturing, and eliminating five manufacturing facilities, one research site, and two preclinical development sites. But it remains unclear whether the initiative is enough to staunch the company’s wounds from ongoing Vioxx litigation, the impending loss the patent on Zocor (simvastatin), and what many perceive as a weak pipeline.

    The investment community immediately pounced on the plan as not extensive enough. In a recent report, Morningstar analyst Tom D’Amore predicted that the costs of implementing the restructuring would offset the potential savings.

    More far-reaching changes are needed before the company’s sales and earnings forecasts will improve, said Le Anne Zhao, an analyst at Caris & Company, in a Nov. 29 report. She described Merck stock as “dead money” for the next year to 18 months.

    Analysts are particularly skeptical about the sales potential of Merck’s pipeline and about the loss of revenue when Zocor goes off patent next year. The drug had the second highest number of sales in the entire industry in 2004, generating $4.6 billion, according to IMS Health.

    “We believe Merck still has valuable assets and a capable research-and-development program to replenish its thinning drug portfolio, but investors will need a strong stomach to ride out what could be a stormy next few years for the firm,” D’Amore wrote.

    Continuing Vioxx lawsuits leave the company financially vulnerable as well, said Cheryl Buxton, global managing director of healthcare markets at Korn/Ferry International, an executive recruiting firm. But she called the lawsuits a catalyst that accelerated change, not its underlying cause.

    The restructuring is an attempt to right excesses left over from the 1980s and early 90s, when the whole industry overbuilt in response to tax issues and trade restrictions, explained Walter Birch, director of Michael Kelly Associates, a managerial recruiting company that specializes in healthcare and financial services. In better times, the industry did not need to be 100 percent efficient he said.

    “The whole industry needs to rationalize itself,” Birch said.

    Other major pharmaceutical companies have gone through downsizing following major mergers, which helped correct lingering excesses, Buxton said.

    “Merck hasn’t gone through that exercise,” she said. “It’s long overdue.”

One of the main challenges facing Merck is retaining staff members in divisions other than manufacturing who are nervous about further layoffs, Birch said.

    “When you look at management, there’s got to be an aggressive play in reassuring the people you want to keep,” he said.

    Buxton agreed, saying that until recently people stayed at Merck for long-term careers. But the company culture has changed in recent years, she indicated, and newer staff members may not be willing to stick it out through the restructuring.

    She indicated that further rounds of layoffs would probably include other sectors of the company, and she identified sales as an easy target.

    Birch agreed that the sales force would probably face some changes.

    “It’s hard to do layoffs in one area without some in all areas,” he said. “With the exception of R&D, I would expect layoffs in ever other area, at least to a certain extent.”