Corporate Announcement - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, everyone. Welcome to Merck's conference call. Today's call is being recorded. At this time I'd like to turn the call over to Mr. Graeme Bell, Senior Director of Investor Relations with Merck. Please go ahead, sir.

GRAEME BELL, SEN. DIR. OF IR, MERCK: Thank you, Michelle, and good morning. I'm Graeme Bell, Senior Director of Investor Relations. We have scheduled this call to review the announcement that we made about the Company this morning. Joining me on the call today is Merck's CEO and President, Dick Clark; Judy Lewent, our Executive Vice President and Chief Financial Officer; and Willie Deese, the President of Merck manufacturing division.

Let me first outlined agenda for this morning's call. On this call we will provide additional context and commentary relating to the matters outlined in the Company's press release issued at 7 AM this morning. Dick Clark will begin with an overview of the corporate restructuring plan. Next, Willie Deese will describe for you the implementation of a new supply strategy by the Merck manufacturing division and then Judy Lewent will wrap up formal remarks including details of the financial aspects of the corporate restructuring plan. Our financial guidance for 2005 and for 2006 will be a significant part of Ms. Lewent's remarks.

After formal remarks are concluded we will open the call for questions regarding this announcement. We do expect the call including Q&A to end at approximately 9:30. As I have mentioned the Q&A perhaps I should make one thing clear up front. I know that many of you will be following the Vioxx case and be interested in the first federal Vioxx product liability case, Plunkett v. Merck, which is scheduled to begin on November 29th in Houston with the U.S. District Court, Judge Eldon Fallon presiding. The trial is expected to take approximately two weeks. At this time Judge Fallon has requested that both parties refrain from public comment on the trial, and Merck is complying with the judge's request.

Before we get into the particulars, let me remind you that some of the statements being made during this call may discuss certain subjects that may contain forward-looking statements as that term is defined in the Private Securities Litigation Act of 1995. These statements are based on management's current expectations and involve risks and uncertainties which may cause results to differ materially from those set forth in these statements. The forward-looking statements may include statements regarding product development, product potential or financial performance.

No forward-looking statement can be guaranteed and actual results may differ materially from those projected. Merck undertakes no obligation to publicly update any forward-looking statement whether as a result of new information, future events or otherwise. Forward-looking statements in this call should be evaluated together with the many uncertainties that affect Merck's business, particularly those mentioned in Merck's most recent 10-K or in Form 10-Q which is posted on the website. With that, I'll turn the call over, and we'll begin with remarks from our CEO and President, Mr. Clark.

DICK CLARK, PRESIDENT & CEO, MERCK: Thank you, Graeme, and thanks to everyone of the phone and webcast for joining us on the short notice this morning. Just over an hour ago we issued a press release unveiling the initial phase of a corporate restructuring plan. This plan represents an important first step in positioning Merck to meet the challenges the Company faces now and in the future.

Like all pharmaceutical companies, Merck is operating in an environment driven by increased competition, cost containment pressures and greater customer demand for value. I believe the plans we are announcing today will help us effectively address these challenges and will enable us to deliver the next generation of Merck medicines and vaccines faster and more effectively. Although these initiatives will negatively affect our near-term EPS growth, we believe they will enhance our competitiveness over the long-term and ultimately shareholder value.

What I'd like to do now on this call this morning is provide you with details about the first phase of our restructuring plan and answer your questions. We expect the initial phase of the cost reduction program to yield cumulative pretax savings of 3.5 billion to 4 billion from 2006 through 2010. A significant portion of the savings through 2010, or approximately $2 billion, will result in the implementation of a new manufacturing supply strategy. These savings in manufacturing should enable Merck's gross margins beyond 2008 to return to the levels consistent with those seen in the period prior to the loss of the U.S. market exclusivity for Zocor.

As part of the global restructuring program, we expect to eliminate approximately 7,000 positions in manufacturing and other divisions worldwide, representing 11% of our workforce by the end of 2008. About half of the positions reductions are expected to occur in the U.S. and the other half in countries outside the U.S.

We intend to sell or close five of our manufacturing facilities worldwide and to reduce operations at a number of others. We also expect to close one basic research site and two preclinical development sites as a result of the restructuring. The sites identified for closure are expected to be closed by the end of 2008 subject to compliance with legal obligations. The closing of the research sites does not indicate a decrease in our commitment to research at Merck.

The pretax costs of planned actions are expected to range from $350 million to $400 million in 2005 and from $800 million to $1 billion in 2006. Through the end of 2008 when the initial phase of the restructuring program should be substantially complete, the cumulative pretax costs of the restructuring activity announced today are expected to range from $1.8 billion to $2.2 billion. Over the full period approximately 70% of the cumulative pretax costs are non-cash relating primarily to accelerated depreciation for these facilities scheduled for closure. The sites identified for closure as part of this announcement are expected to be closed by the end of 2008 subject to compliance with legal obligations.

Before going further let me emphasize one point in particular. Our work in these areas is not complete. We are engaged in an ongoing effort to enhance efficiencies throughout the Company and improve the way we discover, develop, manufacture and market our medicines and vaccines and ensure we get them to patients who need them as quickly, safely and effectively as possible. And we are ready also to make progress towards this goal.

As part of the restructuring plan the Merck manufacturing division will implement a new global supply strategy to create a leaner, more cost-effective and customer focused manufacturing model over the next three years. Willie Deese, President of Merck manufacturing division, will provide details about the supply strategy in a few minutes.

As a result of the changes we are announcing, Merck now anticipates full-year 2005 earnings per share of $2.47 to $2.51 excluding the impact of net tax charges and the impact of the restructuring charges related to headcount reductions and site closures. And we now anticipate reported full-year 2005 EPS of $2.04 to $2.10. For 2006 we anticipate full-year EPS of $2.28 to $2.36, including the approximate $0.07 impact of stock option expenses but excluding the impact of the restructuring charges related to site closures and position eliminations. We anticipate a reported full-year 2006…