Merck Shows "Sensitivity" Amid Massive Cuts

Merck Earnings
CNBC.com
Merck Earnings

You gotta feel sorry for the folks at Merck. Immediately after the drugmaker finishes a program to get rid of more than 10,000 employees, the company drops the ax again.

This time 7,200 people (12 percent of its workforce) will be let go by the end of 2011 (400 are already empty positions that won't be filled). Forty percent of them work in the U.S. And management is gonna feel the pain. Approximately 25 percent of the layoffs will be among mid- and senior-level executives.

Merck branded the first round of cost cuts the "Plan to Win." Thankfully, in today's release Merck doesn't try to sugarcoat it by calling it, "Plan to Win, Again" or giving it any kind of name whatsoever, bucking what seems to be a disturbing trend in corporate downsizing campaigns these days to brand the effort. I mean, imagine if you're one of the 6,800 people at Merck who will get a pinkslip under the guise of your company's "Plan to Win."

On the conference call, Merck Chairman and CEO Dick Clark insisted this isn't a kneejerk reaction to a bad year, that it's a strategic, proactive plan. "If you don't change these business models, we're not gonna survive as an industry, let alone as a company," Clark said. Pretty candid, I'd say.

Merck says the cuts will save the company around $4 billion by 2013. And even though Clark said it isn't in response to current and anticipated sales performance, there are issues there. MRK today lowered its projected compound annual growth rate for revenue and earnings through 2010.

Cost-cutting is the name of the game in big pharma. Especially now that companies like MRK say they can no longer rely on the currency exchange rate to provide as much of a financial cushion. On the call, Merck's President of Global Human Health, Ken Frazier, said the company gets 40 percent of its sales from outside the U.S. and that the decline in the euro to dollar exchange rate "significantly dampens our outlook."

But despite that and the apparent need for more cutbacks, MRK CFO Peter Kellogg said, "We have financial strength." MRK has $19 billion in cash and in its investment portfolio, but $6 billion of that is collateral for stuff like the Vioxx settlement. And Kellogg said the company has access to the credit markets at "attractive pricing".

But like a brand name for a cost-cutting campaign, I'm sure none of that matters one bit to the Merck staffers who could soon be out the door--with a severance package, mind you, but out the door.

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