4 min readOf Big Pharmas and Layoffs

Big pharma companies, big lay-offs and big biotech deals. Stakeholders will be smiling as the pharma giants roll up their sleeves to set things right. While many consider the recent trend a knee-jerk reaction to declining profits and drug failures, people who pull the strings in these companies have a different view of the situation.

Rising healthcare expenditures has been a major concern to the European governments. While price regulations and generic manufacturers are doing a great job in reducing the costs for the government, the companies developing drugs have not helped themselves. One main accusation directed towards these companies is that they have been focusing on developing drugs for the so called ‘costly’ diseases, which have a very low patient population to cater to. While acquiring an orphan drug status has its own advantages, the cost of developing and marketing such a drug outweighs the revenue it would generate. The probability of every such drug developed mimicking the success of Amgen’s Epogen, which is now inevitably under the threat of generic competition, is not high.

Drug approval process for ‘small molecule’ drugs is not getting any better. With stricter guidelines and scrutiny, the cost of approval process has increased. In addition, the cost of legal battles and possibility of withdrawal is much higher. Impending patent expiries of several top drugs are forcing the pharmaceutical companies to cut costs and look for efficiency in operation. The companies have realised the importance of adding promising drug candidates to their pipelines to survive in the lean times ahead. Cue a major restructuring spree to cut costs and increase expenditure in R&D.

Pharmaceutical companies have been closing down manufacturing facilities in Europe and the US, as the outsourcing wave continues to rise. While the strategy of pharmaceutical companies is to reduce costs and thereby maintain profitability, Asia continues to be an attractive proposition. Rising labour and manufacturing costs in western markets is an undeniable factor in the recent shift towards outsourcing R&D and manufacturing. Pharmaceutical companies have realised that their strengths lies in the later stages of product development and are outsourcing R&D to China and India. AstraZeneca has turned to China and announced investments of $100 million in R&D which will be followed by the establishment of its R&D base, the AstraZeneca Innovation Centre China (ICC) at Shanghai’s Zhangjiang Hi-Tech Park. GSK is building a fully integrated, end-to-end R&D centre that will employ more than 1,000 staff by 2010, in China. Cost of employing an experienced R&D person is estimated to be 10 times cheaper in China and India than in the Europe or the US.

Biotech is the buzzword in the pharmaceutical industry. Venture capital investors continue to pour money into biotech start-ups in the hope of financing the development of a blockbuster. Support provided by the governments for SMEs, in the form of tax incentives and collaboration with research institutes could be productive. Biological drugs command much higher prices in the market than the ‘small molecule’ drugs and the safety concerns attributed to biosimilars is added advantage for investing in biologics. The US FDA’s inability to create a clearer drug approval process is of some encouragement to the biotech companies. As the search for the next Amgen continues, the biotech boom has raised another interesting question. How are the governments going to keep the cost of healthcare in check when biological drugs command such high prices? Although there have been proposals to bring forth a clearer approval process for biosimilars, generic manufacturers are left in the dark because of the uncertainty over ‘comparability’ and safety concerns.

European commission has been worried about the competitiveness of European research as compared to the US and the rest of the world. It has introduced new measures to improve the situation such as the Innovative Medicines Initiative (IMI) which will finance research in Europe with €2 billion. Initiatives like this are still not enough to fund the numerous start-ups sprouting all over Europe, which is another story. New regulations offer tax incentives to companies which receive the Young Innovative Company status (companies which are not more than 6 years old and spend atleast 15% of their revenues in R&D). There are many more such initiatives from national governments as well to encourage research in the SME sector. The UK government is raising the small company R&D tax credit from 150% to 175% from April 2008 and the large company rate will also rise from 125% to 130%. Layoffs in the pharmaceutical companies are done with the main aim of redirecting the costs into R&D. However, management of drug development and other late-stage processes in several therapeutic areas is not an attractive option. Considering all the encouragement given to start-ups, acquisition of these young biotech companies is a much better proposition to the pharma giants than developing their own pipelines, which are already dry. Pharma giants, in an effort to acquire the most promising drugs in the market, are paying over and above the value of the companies. Merck’s acquisition of Sirna Therapeutics for $1 billion is just one example.

Even more interesting is the strategy of these promising biotech start-ups, who do their best to attract big pharma companies to acquire their technology, pipeline or the company itself, thereby sidestepping the costs of marketing. Biotech IPOs are not attracting much attention and they are under constant pressure to find a return on investment for their stakeholders. The search for the next ‘Amgen’ could be a long one.

Despite all the encouragement to big and small companies alike to invest in R&D, the pharmaceutical industry is still looking abroad for manufacturing and research activities. The obvious reason being the severe cost control measures taken by the European governments. The UK government, in an agreement with the pharmaceutical industry, slashed the prescription drug prices by 7% in 2005. The UK Health minister has now proposed a reduction of 10% in prescription drug prices, of which the industry will not be happy about. The pharma industry is already shutting down manufacturing facilities in Europe and the US.

Layoffs in the big pharmaceutical companies have mostly been in sales & marketing and manufacturing departments. This calls for a more efficient approach to the respective functions. Pfizer has reduced its staff by almost 10,000 – 10% of its global workforce – and shed 20% of its European sales force in an attempt to save over $1 billion by the end of 2008. Schering-Plough cut over 1,000 jobs – 3% of its workforce – at manufacturing sites in Puerto Rico and New Jersey, in a bid to reduce costs in manufacturing operations and save the company $100 million a year. Outsourcing manufacturing operations reduces the costs and the strategy towards sales and marketing has taken a different route. Pharmaceutical companies believe efficient relationship management, not the number of visits to the physician, is the key to market penetration. The Direct-to-Pharmacy distribution model is another measure, currently being adopted by companies marketing branded drugs, to keep parallel trade out of the system.

Be it layoffs or outsourcing, the pharmaceutical industry is geared up to fight the decline. The governments have to step up efforts and encourage companies, by means other than just the tax incentives, to produce quality R&D, which don’t look promising. For the moment, the pharmaceutical industry has to be in fighting trim until the investments in R&D start producing results.

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