Increasing the pace of change

During 2004, we made significant progress in permanently driving down our cost structure. We succeeded in accelerating initiatives already under way, resulting in increased cost savings earlier than anticipated. Each of Merck’s divisions has identified and is implementing fundamental reductions in costs, without compromising our commitment to patient safety or to research and development. By improving efficiencies company-wide, including in manufacturing, capital investment, procurement and inventory management, we expect to achieve more than $2 billion in cost reductions through 2008.

From streamlining business processes, to minimizing the number of organizational layers, to taking advantage of global procurement and shared services opportunities, Merck is finding new ways to improve the efficiency of our operations and drive down costs.

• The new wholesaler distribution program we launched in the last quarter of 2003 has succeeded in leveling the quarterly volume fluctuations that once made it difficult to streamline our production and reduce inventory levels.
• Merck’s global procurement initiative is introducing new processes in order to leverage our buying power across all divisions to ensure that we are getting the best possible prices for everything we buy, from the chemicals we need to manufacture our drugs to the supplies we need in our offices. These initiatives are expected to provide total savings of $1.2 billion through 2008.
• We are streamlining capital projects using techniques that let us bring new facilities on-line more efficiently and at significant savings. The new vaccine manufacturing facility in Durham, North Carolina, for which we broke ground in October, is an example of a capital project benefiting from this approach. Such initiatives are expected to save Merck more than $600 million by 2008.
• By taking advantage of economies of scale and standardizing processes in areas like finance, information technology, human resources and site services, we expect to generate annual savings of as much as $100 million by 2009.
• Our flexible manufacturing facilities proved their worth following the voluntary withdrawal of Vioxx, as we were able to swiftly re-balance our supply chains to make the best use of our plants’ production capacity. This ability to shift gears allows us to defer as much as $300 million in capital spending and eliminates the need for hiring an additional 300 employees. We expect the savings we are generating in manufacturing to offset inflation.
• We completed the elimination of 5,100 positions throughout the Company, exceeding our previously announced target. This will produce approximately $300 million in savings in 2005, achieving the high end of our original estimate.

These permanent reductions in our cost structure will enable us to dedicate even more of our resources to those functions which directly drive the growth of the Company.