Big Pharma's tough medicine
Giant drugmakers have announced a record number of layoffs in 2007 as they overhaul their businesses in the hopes of reviving their sluggish share prices.
(Fortune) -- It's been a rough 2007 for Big Pharma workers. Crippled by mounting competition and slowing pipelines, the country's largest drugmakers have announced plans to shed a record number of jobs this year - more than 30,000 at last count - that are unlikely to ever return.
The latest sign of the downsizing frenzy: On Thursday, Novartis (NVS) announced plans to lay off 2,500 workers, or about 2.5 percent of its global workforce, by 2010. The Swiss drug maker hinted that deep cuts were coming when it said earlier this year that it would cut about 1,260 sales positions in the United States.
Announcements such as Novartis' seem to be a weekly event. Eli Lilly CEO Sidney Taurel told investors last week to expect cost-cutting with "great intensity." While Taurel said the belt-tightening will happen through attrition and outsourcing instead of mass layoffs, the news was especially sobering since Eli Lilly (LLY, Fortune 500) plans to launch six new medicines by the end of 2010.
"It's a difficult time for drugmakers," said John Challenger, the CEO of outplacement firm Challenger, Gray & Christmas, whose employment tracking service shows that 2007 has been a peak year for Big Pharma hemorrhaging. Drug companies are getting clobbered by cheaper generic medicines, less-productive research, and expiring patents on their most lucrative drugs.
"The business," continued Challenger, "is very different and they're forced to undergo some very painful changes."
In response, the American and European drug giants that have historically dominated the industry are overhauling their businesses. From sales and marketing to research and manufacturing, these companies are finding more cost-effective ways to conjure up and sell new medical treatments. Among other steps, they're redesigning their sales teams and turning to India and China for less expensive manufacturing and research.
Developing countries offer not only the opportunity to create new drugs cheaply, but also their own potentially lucrative market, wrote Michael Steiner, a consultant with financial advisory firm RegentAtlantic Capital, in a recent research report. He noted that developing countries tend to have less-onerous regulatory processes and sufficient intellectual property laws to lure Big Pharma.
"Laboratories [in the developing world] are becoming more sophisticated as they become populated with U.S.- and E.U.-trained scientists, and their research costs are a small fraction of their developed country counterparts," wrote Steiner.
Big Pharma's shift overseas is exacting a heavy toll closer to home. Especially hard hit are manufacturing and research positions. Sales reps are getting the ax too, as medicine-makers devise different ways to sell their medicines. Some companies have toyed with the idea of hiring part-time sales people. For it's part, Pfizer recently partnered with Sermo, an online professional networking site for doctors. The drugmaker hopes Sermo will become a more effective way to communicate with physicians about new treatments.
All told, this year's bloodletting has been greatest at Pfizer (PFE, Fortune 500), which is laying off 10,000 salespeople. Next up are Astra-Zeneca, with 7,600 cuts; Bayer (6,000); Johnson & Johnson (JNJ, Fortune 500) (5,000); and Amgen (AMGN, Fortune 500) (2,600).
Analysts, however, are cheering the newfound austerity. The drug industry, one of the most profitable businesses, has been bloated for more than a decade now. Pfizer, for instance, spends nearly $8 billion a year on research, yet has little to show for it: The world's largest drug company has few medicines to replace its blockbuster Lipitor when the cholesterol-lowering medicine goes off patent in 2010.
Pfizer shares recently hit a one-and-a-half-year low. Likewise, drug stocks have underperformed over the last year. The AMEX Pharmaceutical Index grew just 3.4 percent year to date. Meanwhile, the S&P 500 and Dow Jones Industrials grew 7.5 percent and 11.5 percent, respectively.