Job Losses Hit Pharma Sector as it Braces for Change
Cost cutting continues with aplomb in the pharma sector, but what do the job losses mean for the health of the industry?
The pharmaceutical sector is changing.
Like almost every facet of industry, pharma is stuck in a financial mire. In addition to the worst global economic crisis in decades, pharma has to deal with a dearth of blockbuster drugs reaching the marketplace, and the expiration of lucrative patents as well (see related story, page **).
After years of rampant growth, big-money mergers and heathy margins, the industry is entering perhaps its most significant period of transition.
Amid the financial gloom, even the typically resilient big pharma companies are having to refocus, tightening their belts and slashing millions of dollars from their expenditures. Job cuts were inevitable.
The financial results season has shown mixed fortunes for many players.
Whereas Basel-based Roche in Switzerland saw its pharmaceutical sales leap by 10% - twice the global market growth rate and its sixth double-digit increase in as many years - US giant Pfizer, was a little less upbeat. The world's largest drug maker reported a 90% drop in fourth-quarter net profit to $266m (€208m), from $2.7bn for the same period in 2007.
But no matter what the revenues or profits of these and other producers, a common theme appears to run through the speeches of almost every CEO restructuring and cost-cutting is becoming imperative for growth.
Unprecedented job losses are now pandemic, with producers forced to revise their business plans in an attempt to remain competitive.
"The poor financial climate is not the problem," says Edouard Croufer, director of chemical practice at global consultancy Arthur D. Little. "Unlike other sectors, I'd say that pharma is not being affected by what is happening now the problem started three to four years ago with the progressive disappearance of the blockbusters, which were an enormous cash cow.
NICHE DRUGS = NICHE MARKETS
"It became obvious that they needed to change their strategy and look to products for niche diseases and those far more difficult to treat. With those diseases being so much more specific you don't have multi-billion dollars of sales and such a big market."
"It costs around $1bn to take a drug from concept to market, so the industry has been looking at ways to reinvent itself for a while," says Pamela Spence, UK pharmaceutical leader at consultancy Ernst & Young. "They have to change their business model as it's just not economically sustainable. It's not about cutting costs, it's about changing the way that their whole business operates."
Leading players including Pfizer, the UK's GlaxoSmithKline (GSK) and Astra Zeneca have all announced thousands of layoffs in recent months.
January's announcement that Pfizer was buying US rival Wyeth for $68bn sent shockwaves throughout the industry - particularly when reports suggested a culling of some 19,500 employees.
It reported plans to implement a cost-reduction initiative to slash approximately $3bn. The program will be complete by the end of 2010, with the full savings realized by the end of the following year. It will see the company reduce its workforce by about 10%, with cuts to sales, manufacturing, R&D, and administrative departments. It also plans to close five of its 46 manufacturing facilities.
Not to be outdone, GSK revealed that mass job losses were on the cards as it looks to increase annual savings to £1.7bn ($2.44bn, €1.92bn) by 2011. Some observers suggest as many as 10,000 jobs could go as a result, although the company has not confirmed this.
Speaking at the announcement of GSK's fourth-quarter (Q4) results in February, CEO Andrew Witty said that restructuring had resulted in cost savings of £390m.
"2008 was a turning point for GSK and we are now in a pivotal period of change as we redefine our business model to increase sales growth, reduce risk and deliver long-term sustainable financial performance to shareholders," he said.
"The expansion of our restructuring program is a vital catalyst of this strategy. It will radically change GSK's business model and savings from this program will be used to support our strategic priorities."
Reports say that Astra Zeneca, meanwhile, is also set to slash another 6,000 jobs on top of some 7,000 it announced last year.
In Q4, Astra Zeneca added a further $516m in restructuring and synergy costs - taking the total to $881m for the year. The company said this was an extension to its previously announced $1.97bn program in 2007 and will include further rationalization of the global supply chain, and the restructuring of its sales and marketing teams. When fully implemented, savings are estimated at $2.5bn/year, with around 15,000 staff to go by 2013.
"It's now a much more fragmented market," says Croufer. "Since the cost of discovery is unchanged, with a significant amount of expense over the period, and you have a much smaller market, your cash flow is going to be lower.
RX FOR SURVIVAL
"It all means that they need to reduce costs you don't need such a huge sales force - instead you need a very specific team. All of the top 20 pharma companies globally have been shrinking their workforce in the past few years."
In a sector where innovation remains key for survival, many players still consider their R&D departments as sacred and almost impervious to any job losses. The bulk of the losses are in the marketing and sales departments.
"As so much of the pharma workforce is in sales, proportionately you'll see more job losses in sales and marketing than you would do in R&D - but that's not to say that R&D isn't changing," says Spence.
Croufer agrees: "Jobs are lost in the labs but to a certain extent it is because of a change of focus rather than rationalization the R&D department has to be maintained and modified," he says. "It varies depending on the product and its lifespan but if you take the average portfolio of a pharma company it will spend 20% of its sales on R&D."
Germany's Bayer Group is among those increasing its R&D investment despite the current economic crisis. Only last month, Bayer Schering Pharma - the pharmaceutical division of Bayer Healthcare - said it would invest €100m over the next five years in a new R&D center in Beijing, China. Emerging markets are looking increasingly attractive to the pharma sector.
"The task now is to set the right course so that we can be successful in the long term. Only through innovation can our company generate the growth that is essential to safeguard its sustained success," said Werner Wenning, Bayer's chairman of the board of management during a press forum last December. "This remains one of our guiding principles, and we invest heavily in order to keep to it."
He added that the company's research and development budget in 2008 was around €2.8bn - the nation's biggest R&D budget in the sector, and about 5% of all R&D spending by German industry.
Clearly, businesses are having to respond to the difficult market conditions but there is also a very deliberate move toward diversifying their portfolios and developing their pipeline to offset declining revenues.
The sector is well aware that commoditization, increased competition and a lack of products in the pipeline mean that there will be lean years ahead for blockbuster drugs.
"There have been changes going on for a number of years, but when you're moving from a model that's been entrenched for some time the industry is cautious to make cuts," says Andrew Jones, senior pharmaceutical analyst at Ernst & Young. "There was talk of some paralysis in the market where companies were reluctant to make a move before their competitors. This new model fundamentally requires fewer people, mainly in sales and marketing."
TO BOLDLY GO...
"Nobody really wanted to go first," adds Spence, "did a company want to be the shepherd or the sheep? I think that the credit crisis has given people more confidence to take decisions a bit more boldly.
"I genuinely believe that it has helped to speed up their decision-making process, which is what the industry needs," she says. "You could argue that the current financial malaise has helped pharma expediate some decisions that the business model was crying out for."
This is not the first time the pharma industry has seen this scale of job cuts there was a similar cull in the mid-1990s. However, although thousands of staff lost their jobs, it coincided with the launch of many blockbuster products which saw many rehired, notes Croufer.
With fewer new blockbuster medicines on the horizon and the move to smaller, specialist drugs, it is hard to see a similar outcome in today's environment.
Nevertheless, many concur that change was not only inevitable but necessary.
The pharmaceutical sector is changing.
Like almost every facet of industry, pharma is stuck in a financial mire. In addition to the worst global economic crisis in decades, pharma has to deal with a dearth of blockbuster drugs reaching the marketplace, and the expiration of lucrative patents as well (see related story, page **).
After years of rampant growth, big-money mergers and heathy margins, the industry is entering perhaps its most significant period of transition.
Amid the financial gloom, even the typically resilient big pharma companies are having to refocus, tightening their belts and slashing millions of dollars from their expenditures. Job cuts were inevitable.
The financial results season has shown mixed fortunes for many players.
Whereas Basel-based Roche in Switzerland saw its pharmaceutical sales leap by 10% - twice the global market growth rate and its sixth double-digit increase in as many years - US giant Pfizer, was a little less upbeat. The world's largest drug maker reported a 90% drop in fourth-quarter net profit to $266m (€208m), from $2.7bn for the same period in 2007.
But no matter what the revenues or profits of these and other producers, a common theme appears to run through the speeches of almost every CEO restructuring and cost-cutting is becoming imperative for growth.
Unprecedented job losses are now pandemic, with producers forced to revise their business plans in an attempt to remain competitive.
"The poor financial climate is not the problem," says Edouard Croufer, director of chemical practice at global consultancy Arthur D. Little. "Unlike other sectors, I'd say that pharma is not being affected by what is happening now the problem started three to four years ago with the progressive disappearance of the blockbusters, which were an enormous cash cow.
NICHE DRUGS = NICHE MARKETS
"It became obvious that they needed to change their strategy and look to products for niche diseases and those far more difficult to treat. With those diseases being so much more specific you don't have multi-billion dollars of sales and such a big market."
"It costs around $1bn to take a drug from concept to market, so the industry has been looking at ways to reinvent itself for a while," says Pamela Spence, UK pharmaceutical leader at consultancy Ernst & Young. "They have to change their business model as it's just not economically sustainable. It's not about cutting costs, it's about changing the way that their whole business operates."
Leading players including Pfizer, the UK's GlaxoSmithKline (GSK) and Astra Zeneca have all announced thousands of layoffs in recent months.
January's announcement that Pfizer was buying US rival Wyeth for $68bn sent shockwaves throughout the industry - particularly when reports suggested a culling of some 19,500 employees.
It reported plans to implement a cost-reduction initiative to slash approximately $3bn. The program will be complete by the end of 2010, with the full savings realized by the end of the following year. It will see the company reduce its workforce by about 10%, with cuts to sales, manufacturing, R&D, and administrative departments. It also plans to close five of its 46 manufacturing facilities.
Not to be outdone, GSK revealed that mass job losses were on the cards as it looks to increase annual savings to £1.7bn ($2.44bn, €1.92bn) by 2011. Some observers suggest as many as 10,000 jobs could go as a result, although the company has not confirmed this.
Speaking at the announcement of GSK's fourth-quarter (Q4) results in February, CEO Andrew Witty said that restructuring had resulted in cost savings of £390m.
"2008 was a turning point for GSK and we are now in a pivotal period of change as we redefine our business model to increase sales growth, reduce risk and deliver long-term sustainable financial performance to shareholders," he said.
"The expansion of our restructuring program is a vital catalyst of this strategy. It will radically change GSK's business model and savings from this program will be used to support our strategic priorities."
Reports say that Astra Zeneca, meanwhile, is also set to slash another 6,000 jobs on top of some 7,000 it announced last year.
In Q4, Astra Zeneca added a further $516m in restructuring and synergy costs - taking the total to $881m for the year. The company said this was an extension to its previously announced $1.97bn program in 2007 and will include further rationalization of the global supply chain, and the restructuring of its sales and marketing teams. When fully implemented, savings are estimated at $2.5bn/year, with around 15,000 staff to go by 2013.
"It's now a much more fragmented market," says Croufer. "Since the cost of discovery is unchanged, with a significant amount of expense over the period, and you have a much smaller market, your cash flow is going to be lower.
RX FOR SURVIVAL
"It all means that they need to reduce costs you don't need such a huge sales force - instead you need a very specific team. All of the top 20 pharma companies globally have been shrinking their workforce in the past few years."
In a sector where innovation remains key for survival, many players still consider their R&D departments as sacred and almost impervious to any job losses. The bulk of the losses are in the marketing and sales departments.
"As so much of the pharma workforce is in sales, proportionately you'll see more job losses in sales and marketing than you would do in R&D - but that's not to say that R&D isn't changing," says Spence.
Croufer agrees: "Jobs are lost in the labs but to a certain extent it is because of a change of focus rather than rationalization the R&D department has to be maintained and modified," he says. "It varies depending on the product and its lifespan but if you take the average portfolio of a pharma company it will spend 20% of its sales on R&D."
Germany's Bayer Group is among those increasing its R&D investment despite the current economic crisis. Only last month, Bayer Schering Pharma - the pharmaceutical division of Bayer Healthcare - said it would invest €100m over the next five years in a new R&D center in Beijing, China. Emerging markets are looking increasingly attractive to the pharma sector.
"The task now is to set the right course so that we can be successful in the long term. Only through innovation can our company generate the growth that is essential to safeguard its sustained success," said Werner Wenning, Bayer's chairman of the board of management during a press forum last December. "This remains one of our guiding principles, and we invest heavily in order to keep to it."
He added that the company's research and development budget in 2008 was around €2.8bn - the nation's biggest R&D budget in the sector, and about 5% of all R&D spending by German industry.
Clearly, businesses are having to respond to the difficult market conditions but there is also a very deliberate move toward diversifying their portfolios and developing their pipeline to offset declining revenues.
The sector is well aware that commoditization, increased competition and a lack of products in the pipeline mean that there will be lean years ahead for blockbuster drugs.
"There have been changes going on for a number of years, but when you're moving from a model that's been entrenched for some time the industry is cautious to make cuts," says Andrew Jones, senior pharmaceutical analyst at Ernst & Young. "There was talk of some paralysis in the market where companies were reluctant to make a move before their competitors. This new model fundamentally requires fewer people, mainly in sales and marketing."
TO BOLDLY GO...
"Nobody really wanted to go first," adds Spence, "did a company want to be the shepherd or the sheep? I think that the credit crisis has given people more confidence to take decisions a bit more boldly.
"I genuinely believe that it has helped to speed up their decision-making process, which is what the industry needs," she says. "You could argue that the current financial malaise has helped pharma expediate some decisions that the business model was crying out for."
This is not the first time the pharma industry has seen this scale of job cuts there was a similar cull in the mid-1990s. However, although thousands of staff lost their jobs, it coincided with the launch of many blockbuster products which saw many rehired, notes Croufer.
With fewer new blockbuster medicines on the horizon and the move to smaller, specialist drugs, it is hard to see a similar outcome in today's environment.
Nevertheless, many concur that change was not only inevitable but necessary.
quoted from: www.ICIS.com
