) has been working on reducing its costs for quite sometime now.
Couple of years back, the company initiated a restructuring
initiative to streamline its workforce to generate cost savings.
The company has initiated another global initiative to streamline
its business. Merck announced its plan of reducing its workforce
by 8,500 positions by 2015 end. This is over and above the
previously announced 7,500 positions still to be pared.
The company expects to generate net cost savings of $2.5 billion
by the end of 2015 primarily by reducing marketing and
administrative expenses and R&D expenses. Approximately 40%
of the total cost savings are expected to be realized in 2014.
The total cost of restructuring is expected to be between $2.5
billion and $3.0 billion of which $900 million to $1.1 billion
will be incurred in 2013 (primarily in the third quarter).
The company intends to redirect the savings in investment in its
promising pipeline candidates including MK-3475 (oncology) and
MK-8931 (Alzheimer's disease). Merck also hopes to boost
shareholder value through dividend payments and share buybacks.
The company will also look to boost its pipeline through
Merck plans to move its global headquarters from Whitehouse
Station, NJ to its existing facilities in Kenilworth, NJ by 2015
to generate cost savings.
In its press release, Merck reaffirmed its adjusted earnings
outlook for 2013. Merck expects adjusted earnings in the range of
$3.45 and $3.55 per share. The Zacks Consensus Estimate of $3.49
per share is within the guidance range.
An Industry-wide Trend
We note that several large-cap pharma companies including
) have trimmed their workforce in the last couple of years in the
face of declining revenues due to genericization of key products.
Merck, too, is facing generic erosion. One of Merck's biggest
drugs, Singulair, lost patent exclusivity in the U.S. in Aug
2012. Singulair sales fell 30% to $3.9 billion in 2012. We expect
Singulair to continue witnessing significant sales erosion.
Apart from Singulair, Januvia, a key contributor to the top
line, recorded a 1% decline in first half 2013 sales. Although
Merck is working on reviving sales, we remain concerned about the
rebate and pricing pressure faced by Januvia due to the entry of
new products in the diabetes market.
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Merck currently carries a Zacks Rank #3 (Hold). Currently,
) look more attractive with a Zacks Rank #2 (Buy).