Why Is Schering Cutting Now?

It never ceases to amaze me how companies can announce such large cost-cutting measures when things are looking bleak for their revenue growth. Why was it OK for them to have all that extra fat in the first place?

The latest pharmaceutical company to jump on the cost-cutting bandwagon is Schering-Plough (NYSE: SGP  ) . Granted, some of the cuts are necessary now that doctors aren't interested in hearing Schering's sales reps push its cholesterol drugs. But only some of $1 billion in new savings that Schering hopes to achieve -- on top of an additional $500 million announced previously -- has to do directly with its joint partnership with Merck (NYSE: MRK  ) to sell Zetia and Vytorin. Why had Schering amassed so many superfluous upper-level managers in the first place?

The cuts will come early and often, with most completed by the end of 2010. Including the synergies associated with its acquisition of Akzo Nobel's (Nasdaq: AKZOY  ) Organon BioSciences subsidiary, Schering aims to cut its staff by 10%. In total, the reduced costs could give a 10% boost to the bottom line at a time when the company will likely have trouble growing sales.

Most of the cuts will come in the U.S., since sales of Schering's international drug offerings are actually doing quite well. It recently updated its deal with Johnson & Johnson (NYSE: JNJ  ) to sell J&J's anti-inflammatory Remicade outside the U.S. Moreover, management says that its international cholesterol drug sales aren't being hurt, because the Enhance trial isn't getting as much press in other countries. Any international growth is a welcome sign for Schering, especially if the dollar falls further.

In this market, cost-cutting is the new black -- Wyeth (NYSE: WYE  ) did it just last week. This Fool just wants to know what took the companies so long to slim down.


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