Pharma pains not over, more revamp on anvil

Global drugmakers have cut tens of thousands of jobs ahead of patent expirations on their top-selling products, and the pain is not yet over.

Divisions across these companies — from sales to research to manufacturing — are still seen as vulnerable to additional cuts. Marketing expenses will likely continue to be slashed the most heavily.

“We will see even more restructuring as we near the patent cliff ... selling, general and administrative expenses will take the hardest hits, also manufacturing and research and development,” Morningstar analyst Damien Conover said.

He estimated additional cuts of up to 2% of company workforces, saying “every major pharma will keep doing it.”

The vast sales forces for major drugs going off patent, such as Pfizer Inc’s cholesterol fighter Lipitor, are among the most obvious targets for job cuts.

According to a survey by consultant Challenger, Gray & Christmas, more than 45,000 job cuts were announced by the pharmaceutical industry this year through October, outpaced only by government agencies and nonprofit organisations.

More recently, Switzerland’s Roche Holding AG announced plans to cut 4,800 jobs, or 6% of its workforce, over the next two years.
Novartis said it sought additional cost cuts in manufacturing, marketing and procurement, but dismissed reports that it was readying huge layoffs to do so.

A rolling wave of restructuring reflects the lack of major new drug launches to offset looming generic competition to multibillion-dollar medicines like Sanofi-Aventis and Bristol-Myers Squibb’s drug Plavix for blood clots and Merck’s Singulair for asthma.

While concerns over the “patent cliff” have dogged the industry for several years, in some cases the entry of generic versions of brand name drugs has picked up more quickly than Wall Street had anticipated.

The entry of generics can cause branded drugs to quickly lose at least 80% of US sales, but can be 90% or more once multiple generics are available.

In their latest quarter, Pfizer, AstraZeneca, Eli Lilly, laxoSmithKline and Roche reported sales that were hurt by generics and their shares fell, signalling their valuations may not have the patent loss impact fully baked in.

Most major drugmakers’ shares have been on a downward trend since, with the Arca Pharmaceuticals Index down 4.6% since October 20, compared with a 1.9% rise for the broader Standard & Poor’s 500 Index.

“The patent cliff was expected, but the rate of penetration of generics has been much higher than what anybody imagined,” Deutsche Bank analyst Barbara Ryan said.

According to pharmaceutical market information company IMS Health, four large pharma companies — AstraZeneca, Lilly, Boehringer Ingelheim and Bayer AG — as of the end of 2009, had progressed less than one-third of the way through the patent cliff that runs from 2005 through 2014.

“There is more restructuring to be done ... large pharma, on an aggregate, is 40% of its way through with the patent cliff journey,” IMS Health analyst Murray Aitken said at the Reuters Health Summit earlier this month.

IMS projects generic penetration could reach 85% by 2014.
Drugmakers are also facing greater pricing pressure due to more recent developments, such as a new US healthcare law and price controls in European countries. That raises the need for innovative drugs that generate bigger volumes, if not the sky-high margins of past treatments. Reuters