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SEARLE, MERCK AND BURROUGHS WELLCOME ARE PROTECTING SALES FORCES FROM CUTS IN CURRENT DOWNSIZING MOVE: MERCK’s 3% STAFF REDUCTIONS ARE POLITICALLY SENSITIVE

Executive Summary

Searle and Merck will protect their existing sales force sizes in the U.S. during ongoing staff reduction programs, the companies indicated in separate statements during the week of March 22-26. In a March 24 interview, Searle President of U.S. Operations Andy Anderson noted that the company has not made any cuts in its U.S. sales force as part of the large, 2,250 workforce reduction announced in late November ("The Pink Sheet" Nov. 30, 1992, T&G-6). The majority of Searle's cuts -- about 23% of total employment at Searle -- are being accomplished through a reduction in headquarters staff (through an early retirement package) and through the sale or closure of "certain facilities worldwide." In early February, the firm announced the first of those disposals, affecting two facilities in Belgium and a small research facility in the U.K. Merck indicated that its sales force would be protected from cuts in an March 25 internal announcement explaining plans to eliminate 1,000 jobs by the end of 1993. Merck's primary tool for cutting about 3% of its 38,400 worldwide workforce is an early retirement incentive for salaried employees, primarily those over 50 years of age. Among the group of employees specifically excluded from the Merck early retirement offer are "all field sales representatives and district managers." Also excluded from the early-out incentives are employees in Merck Research Labs development areas, Calgon Water Management and Hubbard Farms. In a similar vein, Burroughs Wellcome USA President Philip Tracy told securities analysts on March 24 that his firm would be building its sales force in the upcoming months, adding about 100 reps to take its total detail force size up over 900. "We've doubled our number [of sales reps] dealing with managed care," Tracy said. With 830 total reps currently, Tracy said: "We don't see reducing our sales force soon." Merck's attempt to protect its U.S. sales force from large-scale retirements sends a different message from Chairman Roy Vagelos' well-publicized statement in late 1991 that it was time for Merck to scale back the size of its U.S. sales force. At that time, Merck had about 2,700 sales representatives in the U.S. The firm has trimmed back about 200 sales positions in the intervening 15 months through attrition and redeployment. The Merck U.S. sales force now numbers about 2,500 people. In addition to the early retirement program, Vagelos told Merck employees that the company is instituting "challenging targets to reduce expense growth in 1993." The company is beginning a process of instituting "cost containment measures." Merck's announcement of reductions was a politically sensitive move for several reasons. Foremost, the headline-grabbing effect of staff reductions by Fortune magazine's most-admired company is likely to have a much more substantial impact than advertising or public relations campaigns to convey a message to the Clinton Administration about the vulnerability of a leading U.S. industry. The announcement of the cuts -- with the anticipated commentary on the difficulties facing the drug industry -- takes some of the gilding off the image of Merck and the industry at a time when appearing profitable is more of a political liability than an investment necessity. With Wall Street already walking away from pharmaceutical companies, Merck had little to lose in the short run from a bad news announcement. Other companies are announcing similarly reduced growth projections, which could change the environment for the fight against the Clinton health care reforms. Merck also showed political awareness by packaging management salary cuts along with the first staff reductions. Vagelos noted at the end of internal announcement of the cutbacks that "those of us on Chairman's Staff will have our salaried reduced by 10% and those on Management Council by 5%." The chairman's staff is made up of eight of the top Merck execs: in addition to Vagelos, it includes President Richard Markham; exec VPs Jerry Jackson, Edward Scolnick, Francis Spiegel and John Zabriskie; and senior VPs Judy Lewent and Mary McDonald. The management council comprises another 22 top Merck execs. According to recent proxy material figures on 1992 executive salaries, Vagelos is giving up about $112,000 in salary and the other five top members of the chairman's staff will be giving up about $50,000 each. Bonuses more than doubled the total compensation for each of the top six Merck execs in 1992. The Merck and Searle approaches to staff reductions - insulating the sales forces from the cuts -- indicate a reluctance throughout the industry to be the first company to risk a substantial cut in sales and marketing expenditures. That reluctance may undercut some of the political value of the cutback message. Some of the most effective criticisms of the industry have been focused on the extent of marketing and sales efforts. If those areas of the companies appear to be sacred cows and manufacturing or other general employment areas appear to be the targets of reduction, then the employment argument may be less persuasive in Washington. By the most recent Commerce Department figures (for 1991), production jobs in the pharmaceutical industry represent about 44% of total employment. Pharmaceutical Manufacturers Association annual survey figures for 1989 indicate a slightly lower percentage for U.S. employment by its members: 33% of 185,900 total workers are involved in production. By PMA's calculations, marketing represented 31% of all U.S. pharmaceutical employment, with 55,500 people in those positions. R&D employed 43,620 (or 22%) of the total. Anderson's comments about Searle employment were part of a corporate public affairs program undertaken by the company to counter the current political attacks on the industry. Anderson has been involved in a campaign of discussions with the media and political visits. As part of the Rx Partners group founded by Searle and staffed by the D.C. public affairs firm Powell Tate, Anderson met on March 20 with the White House health care task force officials involved in the issue of drug costs. The White House contingent was led by economist David Cutler. The Searle exec was joined at that meeting by several of the other companies in the Rx Partners program: Bristol-Myers Squibb, Lilly, Upjohn and Warner-Lambert. Anderson also has participated in more than two dozen congressional visits as part of the current effort. The Powell Tate effort is being coordinated by a senior associate with the firm, Alan Madison, who is described as the project director for Rx Partners. Madison's background is in electoral politics and corporate communications. With the difficulties facing Searle from the challenges to its Calan line of calcium channel blockers and the company's aggressive reaction to a decline in sales, the firm has an effective study to tell about the competitive atmosphere in the drug business. Anderson maintains that a number of drug companies, including Searle, are not making much money. While its main products are under new competitive pressures, the firm has four new products from 1992, including a non- benzodiazepine hypnotic, Ambien (zolpidem), which could fill the niche created by the adverse reaction discussions on Upjohn's Halcion. One of Searle's new products, however, the once-daily oral quinolone antimicrobial Maxaquin, is headed to an upcoming FDA advisory committee meeting to review the potential for dermal tumors associated with use of the product. The March 31 meeting will be a combined session of the Anti-Infective and Dermatologic Drugs Advisory Committees.

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