Analyst to Merck: Get to work chopping costs, preferably $1B-plus

When Merck cut its sales guidance last month, market-watchers predicted cost cuts. Soon, executives would be sharpening their scalpels--or heavier instruments--to compensate. After all, generic competition isn't going away, and the company's pipeline has taken some embarrassing hits of late.

Now, an analyst is urging the company to get started. A "major restructuring" is sorely needed at Merck ($MRK), Leerink Swann's Seamus Fernandez wrote in an investor note this morning, if the drugmaker truly wants to protect its margins and continue distributing cash to shareholders.

"[W]e believe a deep restructuring should be seriously considered in light of the relatively lackluster 2013 top-line performance, disappointing Ph III/registrational pipeline evolution and overall industry challenges," Fernandez wrote, adding, "Movement here likely would be well-received." 

Merck had not responded by press time to comment on the prospect. But it has already been shedding jobs and facilities on the manufacturing side, cutting a hundred jobs here, another hundred there. It's working to reduce overall manufacturing costs, while investing in new facilities in Asia. And in R&D, Merck's new chief Roger Perlmutter has begun shaving jobs and other costs.

To reach the level of savings that Fernandez mentions, Merck would have to cut in a bigger way, and across the board. In urging Merck on, he quoted a $0.25 per share increase in earnings with every $1 billion in costs cut. A 10% reduction in operating expenses would yield about $2 billion in savings.

The company's R&D spending could certainly sustain the hit, he said; the company spent more than $2 billion on R&D during the second quarter, with annual costs upwards of $8 billion. As for marketing and administrative spending, the company racked up more than $6 billion for the first half of this year, or about 28.5% of sales.

Merck is no stranger to cost-cutting or layoffs. The company has shed thousands of workers over the past several years, with some 12,000 to 13,000 job cuts announced in 2011. Its headcount dropped by 3,000 last year.

Special Reports: Merck - Top 10 pharma companies by employees | Merck - Biopharma's Top R&D Spenders - 2012

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