Healthy Skepticism Library item: 7197

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Publication type: news

Lipton J.
More Layoffs Seen For Big Pharma
Forbes.com 2006 Dec 21
http://www.forbes.com/2006/12/21/pfizer-pharmaceuticals-update-markets-equity-cx_jl_1221markets21.html?partner=yahootix

Abstract:

Bad news for drug sales reps: firing you may be a dominant industry theme for 2007.

Cost cutting is likely to continue for large-cap pharmaceutical companies in 2007 and cuts in international sales forces could be a further source of savings, according to Banc of America analyst Chris Schott.

In a client note released Thursday, Schott noted that Pfizer’s recent 20% U.S. sales force cut of about 2,000 reps was a step in the right direction, in his opinion, as the company looks to cut back on its overall cost structure. The layoffs added 5 cents per share per year to their earnings, according to Schott.

With these cuts expected to be completed by the end of 2006, Schott believed Pfizer has the further opportunity to slash headcount among its 20,000 international reps, based on his analysis of sector sales force efficiency.

“When we look at the ratio of sales per rep between regions,” Schott wrote, “Pfizer’s international reps are only 35-40% as efficient as its U.S. force.”

He argued that a significant international sales force cut makes sense. He estimates that a 30% cut to the international team could eliminate $800 million in annual costs.

“Longer term, we believe Pfizer’s mid-to-late stage pipeline is underappreciated by the market, consistent with our buy rating,” Schott wrote.

On Thursday, shares of Pfizer finished down 14 cents, or 0.5%, to $26.07.

Resources are currently being used most effectively at Merck, according to the analyst. He wrote that the Whitehouse Station, N.J.-based drug maker stood out among its peers for sales force efficiency, highlighting the opportunity in a modified international sales model.

“We believe that Merck has adjusted its resources away from sales details and has concentrated on regulatory affairs and access,” Schott noted. “Given the influences of European governments in prescribing decisions, this may be the most appropriate model in the region.”

Schott argued that it now appears Merck is looking to move this model to the U.S. sales force, consistent with its goal of keeping its general and administrative expenses flat on an absolute basis between 2006 and 2010.

He maintained a “neutral” rating on the drug maker with a price target of $44.

Shares of Merck nudged down 3 cents, or 0.1%, to $43.27.

Overall, Schott is positive on the sector heading into the fourth quarter, based on an upward bias in near-term earnings coupled with emerging signs of recovery in the sector’s pipeline.