This is a partial transcript from Your World with Neil Cavuto, October 22, 2003, that was edited for clarity.

Watch Your World w/Cavuto weekdays at 4 p.m. and 1 a.m. ET.

NEIL CAVUTO, HOST: Is there a doctor in the house? Wednesday, the market certainly needed one.

Something’s happened on the way to Dow 10,000: Dow not-so-close to 10,000. Stocks swooning amid talk some companies are still hurting.

And my next guest heads the one they’re blaming for doing just that today. And the killer is, not all the news out of drug giant Merck (search) was that bad.

The company’s earnings were sound, and its sales were up, but its stock was down because neither was what the Street had thought they’d be. Then those layoffs, 4,400 of them, announced there.

Joining me now from Merck headquarters in Whitehouse Station, New Jersey, the company’s chairman and chief executive Ray Gilmartin.

Mr. Gilmartin, thanks for joining us.

RAY GILMARTIN, CHAIRMAN & CEO, MERCK (MRK): Nice to see you, Neil.

CAVUTO: You know, the news wasn’t that bad, and yet the Street pummeled you. What happened?

GILMARTIN: Well, I think that the news in terms of the layoffs and also the change in the distribution agreement which caused a revision in earnings was somewhat of a surprise.

On the other hand, I think that based on investor conversations over the past several months and basically over the past year, you know, we’ve been very clear about how we’ve viewed the future of the industry and what the demands to the marketplace would be.

And so talking about fundamentally lowering our cost structure, which led to now the elimination of 4,400 positions, is very consistent with how we’ve described the kinds of actions to take for the longer term to strengthen our competitive position.

CAVUTO: Now those 4,400 jobs, sir, raised a lot of concerns that others might follow, that this might be swift, that this is unusual for your industry, this is sweeping for your industry, this is unprecedented almost for you.

What was going on?

GILMARTIN: Well, once again, we have been looking now for quite some time. We’ve set up as a strategic priority just about two years ago the idea that we had to become more efficient as a pharmaceutical company, and so what was announced today has been the culmination of efforts that had been under some time in all parts of the company, and this affects all parts of the company worldwide.

And, basically, it’s based on the analysis that we’ve done of all of our operations -- very similar to what companies have done in other industries -- that basically will allow us in the future to perform how we get work done in a much more efficient way at a fundamentally lower cost.

At the same time, we continue to invest behind research. We talked about confirming the guidance of mid to high teens in research spending. We’ll be growing research next year so that we’ll be able to deliver on the market demand of basically novel medicines that really make a difference in patients’ lives but offer those at a competitive price and still maintain our profitability, is what our goal is here.

CAVUTO: But do you think in the bigger picture, Mr. Gilmartin, that the problems hitting Merck and a host of your colleagues, you know, from Schering-Plough (SGP) and on and on is this idea that cost containment is a very real issue, there are a lot of Americans who are increasingly getting cheaper alternatives to drugs from Canada, and that these are almost systemic problems for your industry that are going to weigh on your company. They’re going to weigh on your industry. They’re going to weigh on the stock market.

GILMARTIN: Well, we have been talking for some time about the fact that the industry faces a situation of just greater demand from value for payers and cost-containment efforts around the world, but the key to winning in this kind of environment and being successful is being able to come up with and discover drugs that really make a difference in peoples’ lives that are true advances in patient care, and that’s what we’re all about.

What we’re doing today basically reflects what we think is going to be necessary in the longer term, that all companies in the industry have to be more efficient in terms of how they bring these products to market and how they manufacture them.

CAVUTO: I apologize, sir, but it raises an issue here about how you get drugs to market and how you do that with Zocor, your cholesterol-lowering drug. You have a sort of a co-marketing deal with Schering-Plough with their similar drug.

Are you going to be looking at something like that and do the tough times that your industry is going through mean that some of you are going to have to combine period?

GILMARTIN: Well, I think that the secret to success in the industry is go forward. It basically lies in one’s research excellence and capability, and that’s what we certainly have, is research excellence in our ability to discover novel medicines.

We’ve enhanced that, by the way, through partnerships with a company like Schering-Plough who came up with a novel medicine for lowering cholesterol, which, when combined with Zocor, represents a real significant advance in the whole cholesterol field.

And we’ve expanded our external relationships with a lot of other companies as well, particularly biotech companies in regard to access to early-stage science as well as later-stage compounds...

CAVUTO: I apologize, but, you know, a lot of people looked at your developments today and said there was a bump on the earnings parade here, talking about the market generally, Mr. Gilmartin, maybe people got ahead of themselves and that there are problems for a lot of key companies, yours included. Do you think that’s true?

GILMARTIN: No, and I can speak only for Merck and so on. I don’t see this as basically a problem. I see what we’re doing here is very strategic in nature and not responding to any short-term situations. As I said, we’ve been working on this for some time. This is positioning us to be successful in the longer term.

CAVUTO: All right, Mr. Gilmartin. Thank you very much. We appreciate you stopping by.

GILMARTIN: Thank you.

CAVUTO: Ray Gilmartin. He is the chairman and CEO of Merck.

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