Merck on Track with Manufacturing Restructuring Plan

Whitehouse Station, NJ, (Dec. 6)-Merck & Co., Inc. (www.merck.com) expects the initial phase of its cost-reduction program, first announced in 2005, to yield cumulative pretax savings of $4.5–5.0 billion from 2006 through 2010, with roughly $2 billion of that coming from implementing its manufacturing supply strategy. The company provided the update as part of an earnings outlook here this week.

As part of the manufacturing supply strategy announced in November 2005, Merck plans to sell or close five manufacturing sites and two preclinical sites by the end of 2008. These manufacturing facilities are located in: Ponders End, United Kingdom; Okazaki, Japan; Kirkland, QC, Canada; Albany, Georgia; and Danville, Pennsylvania. The two preclinical sites are in Okazaki and Menuma, Japan. Merck also plans to close its basic research center in Terlings Park, United Kingdom (1).

The facilities’ closures are part of Merck’s supply strategy aimed at creating a global facility network that combines its internal manufacturing network with the manufacturing capabilities of key external suppliers, introducing a new production system based on lean manufacturing principles, and developing a new approach to product commercialization to enable accelerated delivery of Merck's research pipeline through the launch phase (1).

Merck says it remains on track to eliminate 7000 positions by the end of 2008. It has eliminated 3900 positions between the inception of the restructuring program and September 2006.

Merck expects the pretax costs of the restructuring to be $900 million to $1 billion in 2006 and $300–$500 million in 2007. Through the end of 2008, when the initial phase of the restructuring program is substantially complete, the cumulative pretax costs of the restructuring activities are expected to be $1.9–2.2 billion. Roughly 70% of the cumulative pretax costs are noncash and mainly related to the accelerated depreciation for those facilities scheduled for closure.

Merck expects these savings in manufacturing to enable its gross margin after 2008 to return to levels consistent with those seen in the period prior to the loss of its US market exclusivity for “Zocor” (simvastatin).

Seeking reduction in capital expenditures

For 2006, Merck expects its capital expenditures to be roughly $1.1 billion, $200 million less than the $1.3 billion it had previously disclosed. Capital expenditures for 2007 are estimated at $1.2 billion.

As Merck continues its initiatives in managing capital, the total reduction in 2005–2008 is expected to be $1.4 billion versus the company's expectations for long-range capital spending at the end of 2004. Merck continues on track to generate $1.2 billion in aggregate procurement savings across the company by 2008.

1. P. Van Arnum, “Merck’s New Supply Strategy,” PT Sourcing and Management Monthly, 2 (4), e10 (2006).