Merck's Plan to Cut 12K More Jobs Aims to Save $1.5B


Merck's (NYS: MRK) announcement of $2 billion in profits for the second quarter came with some more dispiriting news for the rank-and-file. The company plans to slash its workforce by another 12,000 to 13,000 jobs, as part of a plan to squeeze another $1.5 billion from its annual cost base. The new restructuring would add to cuts related to the Schering-Plough merger, bringing the overall savings to more than $4.5 billion.

Word on the street had been that Merck planned to shed more jobs, but these are numbers approaching the 15,000 to 16,000 workforce cuts announced along with the Schering deal, which closed in November 2009. As the Wall Street Journal notes, the new set of layoffs means that Merck will have cut about 30% of the workforce it had at that time. The company said it had cut more than 12,000 jobs during 2010, but the net workforce reduction was far less because of hiring in other areas.

The new round will hit hard in the United States. Some 35% to 40% of the cuts will be concentrated in the company's U.S. operations, a Merck spokesperson told Dow Jones. Layoffs will come at headquarters, in administrative functions, via consolidation of office facilities, and from the ongoing sale and closure of manufacturing plants. The company plans to continue hiring in some markets, especially emerging markets that Merck has targeted for growth as drug sales stagnate in the U.S. and Europe.

"The realities of our environment dictate the need to operate more flexibly and nimbly from a lower cost base," Merck CEO Kenneth Frazier said on a conference call with analysts (as quoted by the WSJ). Those "realities" include the loss of exclusivity on its blockbuster allergy-and-asthma drug Singulair. "They are focusing on costs," CLSA analyst David Maris told Bloomberg. "That is exactly what they need to do under the new environment we operate under."

With last quarter's announcement, Frazier caught some flak for dispensing with a long-term profits forecast, and for reducing the company's 2011 EPS estimate below analyst expectations of $3.82. He also announced that R&D cutbacks weren't part of his plan, saying that lower pipeline spending would be a "significant underinvestment" in Merck's future.

At the time, analysts complained that Merck wasn't planning to shed costs. Now, they have their cuts. Will the new round of restructuring spare R&D -- even help pay for continuing investment there? One company official told Reuters that's the plan.

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