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Merck Hurt By Lack of New Drug

Posted on: Tuesday, 29 November 2005, 15:00 CST

By The Record, Hackensack, N.J.

Nov. 27--Merck & Co.'s announcement Monday that it will cut 7,000 jobs and shutter five manufacturing plants by 2008 can be traced to a problem afflicting most major drug companies -- a parched pipeline.

And the news of layoffs, other cost cuts and restructuring emanating regularly from New Jersey's pharmaceutical giants is likely to continue until one or more of them is able to unveil a blockbuster new drug or two.

That's the assessment of analysts who follow the industry, both on Wall Street and here in northern New Jersey.

"We're in a period of rough waters for the pharmaceuticals industry," said John A. Challenger, chief executive officer of a firm that assists workers laid off by drug companies.

Merck's announcement is the latest in a string of cutbacks by drug companies that have seen earnings battered by expiring patents and competition from generics.

Whitehouse Station-based Merck, the world's fifth-largest drug maker, said the cuts would help save $4 billion over five years.

It was uncertain whether the closings might include the company's plant in Rahway, which employs about 4,400, or how many of Merck's 8,000 New Jersey employees might be affected.

The 7,000 jobs -- the biggest layoff in the company's 114-year history -- represent about 11 percent of Merck's 62,000 total worldwide workforce.

About half the job cuts will be in the United States.

Richard Clark, who became chief executive officer in May, said in a conference call with Wall Street analysts that the announcement was "the initial phase" of a broader corporate restructuring.

Clark said Merck's revenue and legal troubles did not play a role in his strategy, which is meant to create a more efficient, competitive business. He said the company must maintain sales of its top drugs, launch new ones and better integrate late-stage research and manufacturing to reduce the time to launch new products.

Merck is facing a $2 billion decline in revenues in 2006 because of the expiration of the patent on its biggest-selling product, the cholesterol treatment Zocor, which is expected to bring in $4.5 billion in revenues this year.

Merck also is battling 6,400 lawsuits filed since its withdrawal of the painkiller Vioxx. The drug was taken off store shelves last year after a study determined it doubled the risk of heart illness after prolonged use.

However, the lack of new products is primarily what's driving the downturn in the industry, analysts say.

"If you don't have the latest and the hottest new product coming up through your research-and-development pipeline, what are you going to do? After all, this is 'big pharma,'ŸŸ" said Annette Baron, a consultant with Eagle Research Inc., a Fairfield executive recruiting company that specializes in the pharmaceutical industry.

So far in 2005, the industry has announced more than 24,000 layoffs worldwide, an increase of 150 percent over the same 11 months of 2004, according statistics provided by Challenger, Gray and Christmas Inc.

If the trend continues, 2005 job cuts could outpace the 2003 total of 28,5000, a record for the sector, according to the Challenger, Gray and Christmas figures.

Merck started trimming its workforce in 2003 and last December eliminated 5,100 jobs.

"Merck's troubles go beyond the Vioxx debacle," said Challenger, the CEO. "Throughout the industry, we are seeing an all-out search for the next big prescription drug that will become a profit blockbuster. As a result, several companies are cutting back on sales and marketing staff and focusing their attention on research and development."

Pfizer, Wyeth and Johnson & Johnson, as well as smaller operations such as P.F. Laboratories have reduced employment, often in New Jersey.

In June, the Health Care Institute of New Jersey -a trade group that represents most of the state's pharmaceutical companies -- said its members in 2004 lost 3,173 jobs, 5 percent more than the year before. The institute's companies employ 60,274 in the state.

James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, said New Jersey has seen a "modest" job erosion, that he expected to continue.

"The pharmaceutical industry has been growing quite strongly as a whole, but it's been doing most of the growth outside New Jersey," he said. "New Jersey has been particularly hard hit."

While the employment ranks in the pharmaceutical manufacturing sector have grown by 40 percent nationwide since 1990, the New Jersey sector shrank by 4 percent over the same period, he said.

A key reason, he said, is that New Jersey is an expensive state for businesses and residents.

Mahmud Hassan, who heads the pharmaceutical MBA program at Rutgers University, agreed that an increasingly serious part of the problem is the pipeline -- the flow of drugs under research and development that drug companies hope will make money when their existing products come off patent.

"Nobody has any real breakthrough drugs coming on the market," he said.

Other reasons cited by companies announcing layoffs include the effects of mergers, poor sales for key drugs and the need to restructure and improve efficiency.

Ten days ago, Pfizer announced it would close a factory in Parsipanny and cut 490 jobs. The company also will abandon a proposed state-of-the--art manufacturing facility there.

Pfizer officials announced in February that they are undergoing a thorough review of the company structure that analysts believe could result in thousands of layoffs.

Wyeth in October announced the closure of a plant in Rouses Point, N.Y., for a loss of 1,200 jobs. Johnson & Johnson also announced several hundred layoffs as a result of a New Brunswick plant closing, Hughes said. And Sanofi-Aventis announced a year ago that it would cut 700 New Jersey jobs, fallout from the merger or two of France's biggest drug companies.

P.F. Laboratories announced in September that it would cease operations by next year at a cost of about 160 jobs in Totowa and West Paterson.

The move was prompted by falling sales for painkiller drugs made by the company's parent, Purdue Pharma LP.

By Dunstan Prial and Hugh R. Morley. This article contains material from The Associated Press.

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Copyright (c) 2005, The Record, Hackensack, N.J.

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Source: The Record - Hackensack, New Jersey

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