WHY BIG PHARMA IS

WIELD­ING THE AXE?

BioSpectrum (Asia) - - Bio Content - Aish­warya Venkatesh aish­warya.venkatesh@mmac­tiv.com

Nearly half a dozen pharma giants have an­nounced mas­sive jobs cuts in 2016. Con­sol­i­da­tion has be­come em­i­nent part of the pharma in­dus­try and the re­sul­tant re­struc­tur­ing of com­pa­nies will lead to lay­offs. Also busi­ness model is chang­ing, cus­tomers are chang­ing, eth­i­cal is­sues are be­ing raised etc. These el­e­ments will fur­ther put a lot of pres­sure on large pharma com­pa­nies to re­struc­ture them­selves.

Mar­ket re­search firm Eval­u­ate Pharma, in its an­nual World Pre­view re­port, projects a global growth rate of 6.3 per cent CAGR for the pharma in­dus­try through 2022, up from the 5 per cent CAGR it pre­dicted last year for the 2014-2020 pe­riod. These fig­ures look so promis­ing to any in­di­vid­ual who looks for­ward to make a bright ca­reer in the pharma in­dus­try. How­ever, it’s not so rosy out there with many pharma com­pa­nies ax­ing jobs and an­nounc­ing site clo­sures. The phrase ‘hire and fire’ best de­scribe the heady jobs, fat pay and ex­cit­ing op­por­tu­ni­ties that come with a high risk of los­ing it all. While com­pa­nies ar­gue that re­struc­tur­ing, set­ting pri­or­i­ties and work­force op­ti­miza­tion is part of a nat­u­ral growth process, the high num­ber of lay­offs last year have left many in­dus­try ex­perts and em­ploy­ees baf­fled.

As I write this today, Is­re­ali drug gi­ant Teva’s CEO has an­nounced that Teva will close or sell six plants in 2017 and an­other nine in 2018. The firm has also de­cided to pull out from some mar­kets by the end of 2017. The move is ex­pected to im­pact nearly 7,000 work­ers glob­ally, few job cuts have al­ready be­gun in 2016. “Given the cur­rent en­vi­ron­ment, we have had to take swift and de­ci­sive ac­tions. We are fo­cused on ex­e­cut­ing mean­ing­ful cost re­duc­tions, ra­tio­nal­iz­ing our as­sets and max­i­miz­ing their value, ac­tively pur­su­ing di­vesti­ture op­por­tu­ni­ties and strength­en­ing our bal­ance sheet. We will con­tinue to take ac­tion to ag­gres­sively con­front our chal­lenges,” the com­pany’s in­terim CEO Yitzhak Peter­burg said in a state­ment. The com­pany re­ported a net loss of $6 bil­lion for the quar­ter, com­pared to a net in­come of $188 mil­lion in the same pe­riod a year ear­lier.

Teva is not alone. Af­ter a buoy­ant 2015 which saw very few job cuts, many big pharma ended 2016 on a sour note, bid­ding painful good­byes to many em­ploy­ees. Blame it on M&A, patent cliff or drop in sales, many mas­sive pharma com­pa­nies con­tinue

to slice and dice sec­tions of its em­ployee base. With ever ris­ing de­mand for health­care and medicines, it may seem like the phar­ma­ceu­ti­cal in­dus­try will never ex­pe­ri­ence down­siz­ing and re­struc­tur­ing, but job cuts are hap­pen­ing all over the place. For any or­ga­ni­za­tion to suc­ceed tal­ented work­force is as im­por­tant as money, vi­sion and an in­no­va­tive idea. With global in­crease in de­mand for medicines and qual­ity health­care ser­vices, the field of life sciences has be­come a tril­lion-dol­lar sec­tor, at­tract­ing many peo­ple to pur­sue this dis­ci­pline. Re­al­iz­ing the im­por­tance of skilled work­force big pharma also in­vests mil­lions each year in train­ing work­ers and re­cruit­ing new em­ploy­ees. So what is caus­ing the big pharma job cuts?

“There are sev­eral fac­tors con­tribut­ing to down­siz­ing the work­force in pharma in­dus­try,” ex­plained, San­jeev Ku­mar, In­dus­try Man­ager-Asia Pa­cific, Trans­for­ma­tional Health: Life sciences, Frost & Sul­li­van, Kuala Lumpur, Malaysia “Some of the lead­ing rea­sons are-Con­sol­i­da­tion in mar­ket – M&A, Strate­gic al­liances, Down­siz­ing R&D, de­plet­ing R&D pipe­line, Out­sourc­ing of ser­vices such as Clin­i­cal devel­op­ment and man­u­fac­tur­ing, Chang­ing cus­tomer base is im­pact­ing the sales force.”

Af­ter merg­ers, lay­offs fol­low

Global M&A trans­ac­tions in the pharma in­dus­try are in­creas­ing ev­ery year since 2007. And it’s likely that 2017 may even be a big­ger year for deal mak­ing -- al­ready we have seen a num­ber of very high pro­file merger an­nounce­ments (think Pfizer’s $17 bil­lion ac­qui­si­tion of Hospira in 2015). Ex­ec­u­tives call it syn­ergy, and some­times that’s true. But what it in­evitably means is job loss, as com­pa­nies cut back on peo­ple in the ar­eas where the newly joined cor­po­ra­tions over­lap. In most cases, lay­offs are a sure out­come of merg­ers and ac­qui­si­tions and this should not be sur­pris­ing as in or­der to achieve ef­fi­cien­cies and cut costs, com­pa­nies opt for con­sol­i­da­tion.

“In an M&A sit­u­a­tion the R&D of the ac­quired com­pany is usu­ally the ob­ject of the ac­qui­si­tion, and so tend to be safe in the im­me­di­ate af­ter­math of the ac­qui­si­tion, said Ravi C Das­gupta, founder, RCD HR Con­sult­ing. “How­ever, it may lead to shut­down of some man­u­fac­tur­ing sites, job cuts of filed force mem­bers. In many sit­u­a­tions even the top man­age­ment is at risk as there can’t be du­pli­ca­tion of roles at the top. At times there is in­vestor pres­sures to con­trol costs and this may lead to some ex­pen­sive R&D pro­grammes get­ting chopped lead­ing to lay­offs. R&D pro­grammes of­ten need con­stant in­ter­ac­tion with mar­ket­ing and top man­age­ment; which may not be pos­si­ble when an R&D site of an ac­quired com­pany is in a dif­fer­ent ge­og­ra­phy. Such pro­grammes may some­times suf­fer for lack of at­ten­tion from the top and may even­tu­ally get shelved.”

Ear­lier this year, Ja­panese drug gi­ant Takeda ac­quired Cam­bridge based biotech firm Ariad Phar­ma­ceu­ti­cals for $5.2 bil­lion. More than half of Ariad Phar­ma­ceu­ti­cals’ (ap­prox­i­mately 300) are at a risk of los­ing their jobs as a re­sult of the merger, said a spokes­woman for the Ja­panese drug maker.

Das­gupta noted, “One of the main rea­sons for M&A in the pharma in­dus­try is the dry­ing up of new

“M&A is one of the main fac­tors for lay­offs in the phar­ma­ceu­ti­cal in­dus­try. There are sev­eral fac­tors con­tribut­ing to job re­dun­dan­cies in the event of an M&A. All the non-rev­enue gen­er­at­ing units within a com­pany get du­pli­cated post-merger such as Ad­min­is­tra­tion dept, op­er­a­tions etc. Dur­ing the stream­lin­ing of these func­tions, some of the em­ploy­ees get laid off. Some­times the rev­enue gen­er­at­ing func­tions also get af­fected such as 2 big pharma merg­ing might lead to re­dun­dancy of their sales force with sim­i­lar ca­pa­bil­i­ties re­sult­ing in lay off.” - San­jeev Ku­mar

In­dus­try Man­ager -Asia Pa­cific, Trans­for­ma­tional Health: Life sciences, Frost & Sul­li­van, Kuala

Lumpur, Malaysia

prod­uct pipe­lines. When pharma ma­jors see that some block­buster mol­e­cule is due to come off patent in the near fu­ture, and do not have some­thing equally promis­ing to com­pen­sate for the re­sul­tant drop in sales, they tend to dig into their deep pock­ets and ex­plore M&A op­tions in­stead; hop­ing that the ac­quired com­pany has a bet­ter pipe­line. As such a com­pany is not go­ing to come cheap, there is a per­ceived need to jus­tify the high cost of ac­qui­si­tion by off­set­ting it against some sav­ings. This is usu­ally done by con­sol­i­da­tion of op­er­a­tions and re­duc­tion in head­count of the merged en­tity. The ac­tual sav­ings rarely match the pro­jec­tions at the time of the ac­qui­si­tion; but that is an­other story.”

R&D Down­siz­ing

Ja­panese drug maker Dai­ichi Sankyo re­cently an­nounced plans to pull down the shut­ters of its In­dian R&D cen­tre in Gur­gaon, as part of its global re­struc­tur­ing pro­gram. The move is ex­pected to im­pact nearly 170 em­ploy­ees working at the cen­tre. The shut­down in In­dia fol­lows Dai­ichi’s clo­sure of UK and Ger­many R&D sites as the com­pany plans to con­sol­i­date its R&D ac­tiv­ity to drive down costs. Last year, No­var­tis an­nounced plans to shut down an R&D fa­cil­ity in China and move a sec­ond from Sin­ga­pore to the US as part of a wide-rang­ing re­vamp of its re­search base. Ear­lier this year, Alex­ion phar­ma­ceu­ti­cals had also an­nounced clo­sure of few R&D pro­grams, im­pact­ing 200 peo­ple.

It’s es­ti­mated that, on av­er­age, a new drug com­ing to the mar­ket needs 1,000 peo­ple, 12-15 years, and up to $1.6 bil­lion. Phar­ma­ceu­ti­cal com­pa­nies are grap­pling with these scan­dalous costs and are lean­ing to­wards ac­quir­ing com­pa­nies with es­tab­lished pipe­lines in or­der to fill up the gap due to patent cliffs. This is lead­ing to re­duced interest in sus­tain­ing large R&D sites and re­sults in clo­sure of these sites. In re­cent months and years, in-house R&D op­er­a­tions at big pharma com­pa­nies have been a near-con­stant tar­get of job cuts, es­pe­cially at large firms like As­traZeneca, Glax­oSmithK­line, Al­ler­gan, No­var­tis, and Am­gen. Ac­cord­ing to re­ports As­traZeneca has cut more than 8,000 jobs, and more than 2,000 in R&D, since 2010 alone. In 2014, As­traZeneca an­nounced the clo­sure of its Ban­ga­lore site in In­dia im­pact­ing nearly 160 em­ploy­ees.

San­jeev Ku­mar ob­served, “There is a chang­ing busi­ness model in the R&D in­dus­try. The tra­di­tional model of in-house drug devel­op­ment is be­ing shift­ing to­wards ac­quir­ing the mol­e­cules from out­side. This trend is help­ing a lot of small and mid-size pharma com­pa­nies to fo­cus on in­no­va­tion and in the process cre­at­ing a huge need for trained & skilled staff. Hence, a redis­tri­bu­tion of re­sources and tal­ent has be­come quite com­mon trend.”

The long over­all time of phar­ma­ceu­ti­cal R&D im­pacts the to­tal R&D costs, the risk of in­dus­try ri­valry and the un­cer­tain­ties of generic com­pe­ti­tion. Prin­ci­pally, a re­duc­tion in R&D costs is com­bined with a re­lease of R&D per­son­nel and out­sourc­ing of R&D ac­tiv­i­ties to ser­vice providers in low-cost coun­tries to re­duce op­er­a­tional and in­fra­struc­ture costs.

Today, M&As, col­lab­o­ra­tions have be­come in­creas­ingly im­por­tant in the bio­phar­ma­ceu­ti­cal sec­tor. In­stead of fo­cus­ing on R&D which is filled with un­cer­tain­ties, phar­ma­ceu­ti­cal com­pa­nies use M&As to com­pen­sate rev­enue losses of block­buster patent ex­pi­ra­tions, to ac­cess strate­gi­cally im­por­tant in­tel­lec­tual prop­erty (IP) to fill R&D pipe­line gaps. A re­port says that nearly, 50 % of the R&D pipe­lines of multi­na­tional phar­ma­ceu­ti­cal com­pa­nies come from external sources.

Loom­ing Patent cliff

In its re­port, Pharma 2020, PwC men­tioned that the phar­ma­ceu­ti­cal in­dus­try’s long suc­cess­ful strat­egy of plac­ing big bets on a few mol­e­cules, pro­mot­ing them heav­ily and turn­ing them into block­busters worked well for many years. How­ever now the sce­nario is chang­ing as the in­dus­try’s R&D pro­duc­tiv­ity has plum­meted and

“In the past, lay­ing off em­ploy­ees was usu­ally the re­sult of a sud­den change in di­rec­tion in which an or­gan­i­sa­tion has been mov­ing. Ei­ther the com­pany de­cides to con­sol­i­date its re­sources by clos­ing down a fa­cil­ity, or it de­cides to exit a line of busi­ness and so scaled down op­er­a­tions as a re­sult of these strate­gic de­ci­sions.” - Ravi C Das­gupta founder, RCD HR

Con­sult­ing

the en­vi­ron­ment’s chang­ing. In 2016, As­traZeneca’s $7.4 bil­lion sale was un­der threat when two of its block buster drugs lost patent ex­clu­siv­ity. Ac­cord­ing to an in­fo­graphic pro­duced by Dick­son Data, in 2017, a to­tal of 22 drug patents will lose pro­tec­tion. Merck is in the hot seat this year, with four ma­jor drugs ex­pected to roll off the patent cliff. Glax­oSmithK­line had no new ap­provals and will lose ex­clu­siv­ity on three of its long­stand­ing drugs this year, Ar­ra­non, Treximet and Me­pron, Dick­son data showed. To cope with these huge losses of key rev­enue sources com­pa­nies wield the axe to cut costs and sus­tain busi­ness.

Iron­i­cally, the big­gest prob­lem phar­ma­ceu­ti­cal com­pa­nies’ face is their block­buster drugs. At their peak these drugs bring in bil­lions of dol­lars in grow­ing rev­enues, pos­i­tively im­pact­ing the stock price. But as they ap­proach patent ex­piry - and some­times even dur­ing the life­time of the drug - com­peti­tors jump in and erode their sales. It’s ex­tremely hard to de­velop a drug that can be a po­ten­tial multi­bil­lion-dol­lar one, and it is even more dif­fi­cult to re­place it once it’s off the ex­clu­siv­ity list.

Big phar­ma­ceu­ti­cal com­pa­nies have to re­sort to buy­ing pipe­lines to com­pen­sate for the top-line loss that are caused due to patent ex­pires. More of­ten than not they end up pay­ing a hefty pre­mium for it, and all this comes at a cost- mostly job cuts! Loss of patent ex­clu­siv­ity has acted as a key driver for Big Pharma’s trend to cut jobs over the past five years. The year 2010 saw nearly 40,000 job cuts just ahead of a huge patent cliff in 2011-12.

The re­duc­tion in pharma jobs and the per­sonal toll in­curred by fam­ily dis­lo­ca­tions or the need to find a new job are terrible. How­ever not ev­ery­one’s story ends this way. BioSpec­trum spoke to a few peo­ple im­pacted by site clo­sure of As­traZeneca in In­dia. Some peo­ple took early re­tire­ment, oth­ers changed ca­reers. But many moved on to new op­por­tu­ni­ties and are hav­ing great suc­cess. Few are in top or­ga­ni­za­tional posts or have started their own ven­tures. Hence, though lay­offs are bad, it helps in redis­tri­bu­tion of tal­ent and fa­cil­i­ties from big­ger com­pa­nies to smaller com­pa­nies and star­tups which is ben­e­fit­ting the in­dus­try. All said and done, lay­offs in biotech and phar­ma­ceu­ti­cal com­pa­nies are pre­dicted to con­tinue, es­pe­cially now that the in­dus­try and its land­scape are con­stantly chang­ing.

San­jeev Ku­mar, con­cluded, “Con­sol­i­da­tion has be­come em­i­nent part of the pharma in­dus­try and the re­sul­tant re­struc­tur­ing of com­pa­nies will lead to lay­offs. Also busi­ness model is chang­ing, cus­tomers are chang­ing, eth­i­cal is­sues are be­ing raised etc. These el­e­ments will fur­ther put a lot of pres­sure on large pharma com­pa­nies to re­struc­ture them­selves.”

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