Merck & Company, the third-largest American drug maker, plans to close five manufacturing plants by 2008 and lay off 7,000 employees, about 11 percent of its work force, as it struggles with falling sales and profits.
The cuts, which the company announced yesterday, come after a similar announcement from Pfizer in April and are the latest sign of the problems faced by major drug makers as patents on some of their most profitable medicines expire.
Next June, Merck will begin to face low-priced generic competition on Zocor, a cholesterol-lowering drug that is its top-selling medicine, with sales of $4.5 billion expected this year.
Merck has almost 62,000 employees, half of whom work in the United States, and 31 plants, including 6 in this country, mainly along the East Coast. About 3,500 of the jobs Merck plans to eliminate are in the United States, with the rest overseas, the company said. Besides the plant closings, Merck is shutting three research laboratories.
The company declined to disclose the location of any of the plants or laboratories it is closing, saying it needed to notify employees first.
The layoffs will save the company a total of almost $4 billion by 2010, or about $1 billion a year, Merck said. Overall spending on research and development will be flat, it said.
Merck also predicted yesterday that sales of two of its best-selling drugs would fall short of analysts' expectations in 2006. It said profit next year would probably be about $2.30 a share, not including restructuring costs, down from about $2.50 this year and slightly below Wall Street's forecasts.
Shares of Merck tumbled by 4.6 percent yesterday.
Richard T. Clark, Merck's chief executive, said in an interview yesterday that the layoffs and plant closings, which will cost about $2 billion by the time they are finished in 2008, were only part of a broader overhaul of Merck's corporate structure. Merck will announce a reorganization of its research and sales divisions in a meeting with analysts on Dec. 15, he said.
"This is only the initial step, the first phase," said Mr. Clark, who was promoted in May to chief executive after the resignation of Raymond V. Gilmartin. "This is getting the foundation solid."
He declined to say whether Merck would announce additional layoffs at the Dec. 15 meeting.
Asked what he would tell employees worried about Merck's future, he said, "You have a right to be concerned." He added that he was doing everything possible to restore Merck's reputation and competitive position.
Like other drug companies, Merck has struggled recently to find new medicines. And the company's formerly pristine image has been sullied by thousands of lawsuits over Vioxx, a painkiller that Merck stopped selling in September 2004 after a clinical trial showed Vioxx could cause heart attacks.
Cheryl Buxton, a managing director for Korn/Ferry, an executive search firm, said that morale inside Merck had plunged since the withdrawal of Vioxx.
"They've been slow to react, slow to change," Ms. Buxton said. "I think the morale will get lower, and we'll see increased turnover, voluntary turnover. I think people will start to leave who would never have done so two or three years ago."
Analysts said they were generally unimpressed with Merck's announcement and were concerned about the company's guidance that sales of Fosamax, an osteoporosis treatment, and Cozaar, a blood pressure medicine, will be flat or drop in 2006. Fosamax is Merck's second-largest selling medicine, while Cozaar is fourth.
"Has the outlook really changed? The answer is no," said David Moskowitz, an analyst at Friedman, Billings, Ramsey & Company. "We still have a company that has ailing growth prospects, and we still have a company today that has Vioxx liability risk."
Unless it can find new drugs to improve its prospects, Merck may be forced to announce more job cuts, Mr. Moskowitz said. "Merck has a precedent of announcing head count reductions and then coming back to the table and cutting even further."
Merck's stock closed at $29.56, down $1.42. The company's shares had risen recently, after its victory earlier this month in the second Vioxx lawsuit to reach a jury.
The layoffs and plant closings are overdue, said Roddy Martin, vice president for life sciences at AMR Research, a consulting firm that helps manufacturers operate more efficiently. Throughout the drug industry, manufacturing plants run at less than 40 percent of their capacity, Mr. Martin said.
Historically, the industry has tolerated that inefficiency because the profit margins on drugs are so high; pills whose chemical ingredients cost a few pennies are sold for several dollars each. But with drug makers facing pressure for lower prices from consumers, insurers and governments, the industry must learn to develop and produce drugs more cheaply, Mr. Martin said.
Merck did not announce deep reductions in its sales force. Like other drug makers, Merck has several thousand representatives who visit doctors' offices to promote its medicines. Many doctors complain that their offices are inundated by poorly trained representatives, and Wall Street analysts have predicted that the industry's sales forces will be cut.
But so far the big drug makers have been reluctant to reduce their staffs, believing that any company that cuts its representatives will lose market share if its competitors do not follow.
Scott Henry, an analyst at Oppenheimer, said that companies must market new drugs heavily to prevent prescriptions from going to much cheaper generic competitors.
"You're selling a premium product," Mr. Henry said. "There's still a sale involved."
Still, Merck may have to cut costs further, especially because Fosamax, which will have about $3.5 billion in sales this year, will be opened to generic competition in 2008, he said.
"At the end of the day, if you're going to lose Fosamax, Vioxx, and Zocor in a short period of time, you're going to have to right-size the company, which means either finding new revenues or cutting costs."
