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Merck (MRK - Analyst Report) 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 Benefits

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 acquisitions.

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 Pfizer (PFE - Analyst Report) and AstraZeneca (AZN - Analyst Report) 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.

Merck currently carries a Zacks Rank #3 (Hold). Currently, companies like GlaxoSmithKline (GSK - Analyst Report) look more attractive with a Zacks Rank #2 (Buy).

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