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Merck to slash 7,000 jobs

US company announces restructuring plan in a bid to turn its fortunes around

Merck is to cut 7,000 jobs by 2008 and sell or close five manufacturing plants as part of an overall restructuring plan designed to save the company $3.5bn to 4bn in annual costs.

Chief executive Richard Clark, who took over in May, said the actions were a ìfirst phaseî of the plan but would not reveal how many more phases would follow.

Merck has been under tremendous pressure on several fronts; its biggest-selling drug, cholesterol lowering Zocor loses US patent protection next year, which threatens around $5bn in annual revenue.

The company is also defending itself in 6,400 lawsuits filed since it withdrew the painkiller Vioxx last year when a study showed it doubled the risk of heart problems in patients after 18 months of daily use.

There is also some scepticism over whether the new drugs in Merck's pipeline will be sufficient to cover the gaps by the loss of Zocor and osteoporosis drug Fosamax, its second biggest seller which loses patent protection in 2008.

The 7,000 jobs account for around 11 per cent of Merck's worldwide workforce. So far the company has declined to say whether any of the job cuts would come from sales and marketing, saying only that some would come from the manufacturing division and half of the total cuts would come from facilities outside the US.

ìMerck is operating in an environment driven by increased competition, cost containment pressures and greater customer demand for value,î said Clark. ìI believe the plansÖwill help us effectively address these challenges and will enable us to deliver the next generation of Merck medicines and vaccines faster and more effectively.î

Some analysts were critical of the plan, saying that it was merely a short-term cost-cutting exercise.

ìAt the end of the day, the only thing you've done is maintain the margin,î said Bernstein Investment Research and Management analyst Richard Evans of the restructuring plan. ìThis comes across as a game of defence not a game offence. It's not a transformational strategy - you're treading water.î

Oppenheimer & Co analyst Scott Henry said it was likely that Merck would downsize even further in the future: ìMerck is in the business of drug discovery, not cost-cutting. So therefore the question isn't how much costs you can cut out of the system, but how can we get those next big new revenue drivers.î

Out of the estimated $3.5-4bn pretax savings the restructuring plan is expected to yield from 2006 to 2010, Merck said that about $2bn of those savings will result from the implementation of a new supply strategy. Merck executives said the new strategy would create a ìleaner, more cost-effective and customer-focused manufacturing model over the next three yearsî.

In the third quarter, Merck won US regulatory approval for its Proquad vaccine against measles, mumps, rubella and chickenpox, the first such combination in a single shot. Earlier this month, the company said its experimental vaccine, Gardasil, prevented 100 per cent of cells on the cervix from becoming pre-cancerous and blocked development of a cancer that occurs on the cervix surface.

30th September 2008

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