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Healthy Skepticism Library item: 12194

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.


Publication type: news

Hirschler B.
Big pharma shrinks as slowdown forces cuts
Globe and Mail 2007 Dec 14

Full text:

Big pharma is getting smaller.

The decision yesterday by Novartis AG to cut 2,500 jobs highlights the accelerating pace of cost-cutting in a sector facing a worrying slowdown in growth, as research labs fail to deliver, generic competition bites and pressure on prices grows.

For pharmaceutical investors, the belt-tightening brings short-term cheer. Shares in Novartis rose 1 per cent in a sharply weaker European market as analysts relished the $1.6-billion (U.S.) in annual savings its cutbacks should reap in 2010.

But further out, the combination of cuts and increased share buyback programs do little to imbue confidence that executives have found the prescription for a return to the double-digit percentage growth rates of the past.

The restructuring at Swiss-based Novartis comes just a week after Bristol-Myers Squibb Co. announced similar plans to eliminate 10 per cent of its work force and close plants.

Others – including Pfizer Inc., AstraZeneca PLC, Merck & Co. Inc., GlaxoSmithKline PLC, Amgen Inc., Schering-Plough Corp., Eli Lilly & Co. and Johnson & Johnson – have already bitten the bullet.

After the mega-mergers of the late 1990s, large-cap pharma is on a crash diet.

Next up may be Sanofi-Aventis, according to analysts at Deutsche Bank. The French group has already said it will control spending more tightly and could use cutbacks to deliver a more bullish than expected outlook for 2008.

Aggregate job losses announced so far this year across the industry total around 40,000 – and more are widely expected.

“Given the number and size of patent expiries over the next five years, we certainly expect more cost-cutting measures from the industry,” said Denise Anderson of Landsbanki Kepler.

Makers of branded drugs face a looming patent cliff between now and 2012 as most of the high-margin drugs developed in the 1980s and 1990s lose protection, including Pfizer’s Lipitor cholesterol pill, the biggest-selling medicine in history.

It is perhaps no surprise, then, that the world’s top pharmaceutical makers are losing their traditional position at the top of the corporate ladder. Pfizer, the global leader, is now worth 25 per cent less than Google Inc.

The poor profit prognosis has triggered unprecedented soul-searching within the sector, as companies reassess the way they do business.

A growing number are outsourcing some previous core functions. AstraZeneca, Glaxo and Bristol-Myers, for example, have all recently announced plans to contract out large parts of drug manufacturing.

“They are trying all kinds of things and part of it is to probably get smaller and better in the areas where they are really good,” Ton Gardeniers, global head of health care at ABN Amro, told a recent pharmaceuticals conference in London.

A debate has also re-opened over focus. Some firms, like Bristol-Myers, have opted to go back to their knitting by divesting non-pharma businesses.

Nick Lowcock, head of European health care investment at buyout specialist Warburg Pincus, believes managers are learning some hard lessons from private equity.

“Big pharma is coming under more pressure to recognize value in their assets, so I would expect to see more non-core assets divested,” he said. “The problem of non-core assets is that they distract attention from the things you really should be doing.”

DZ Bank analyst Peter Spengler thinks Novartis’s latest restructuring could be the first step toward the group becoming a pure pharmaceutical player.

Despite the recent sale of nutrition and baby-food units, it still has a range of operations including contact lenses and over-the-counter and generic drugs.


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