Hard re­al­i­ties of PHARMA

In the last few years, bio­phar­ma­ceu­ti­cal in­dus­try has been scal­ing back R&D de­part­ments, slash­ing sales teams, and elim­i­nat­ing re­dun­dan­cies in post-merger work­forces. This has re­sulted in a huge elim­i­na­tion of jobs. Top pharma com­pa­nies have been merg­ing

BioSpectrum (Asia) - - Bio Content -

Pharma and Health­care in­dus­try is tra­di­tion­ally sub­jected to an ever chang­ing and in­creas­ingly com­pet­i­tive land­scape. It has un­sur­pris­ingly also seen a dis­pro­por­tion­ate share of or­ga­ni­za­tional re­struc­tur­ings, im­mi­nent lay­offs, and even out­right shut­downs and bank­rupt­cies.

So, much so, that any M&A ac­tiv­ity in­volv­ing com­pa­nies in this sec­tor is ac­com­pa­nied by an al­most im­me­di­ate media spec­u­la­tion around an in­evitable re­trench­ment and right-siz­ing ac­tiv­ity that will fol­low. Ac­cord­ing to var­i­ous re­ports, it is es­ti­mated that more than 300,000 pharma jobs may have been lost since the start of this cen­tury. That said, even this may be a very nar­row view fo­cussing solely on num­bers re­ported by the larger players and without nec­es­sar­ily hav­ing fully ac­counted for all re­gional or sec­toral vari­ances. Also, true ac­count­ing for the in­di­rect im­pact this has likely

had on the sup­pli­ers and other sup­port­ing in­dus­tries is mostly not con­sid­ered.

Of course, it may be worth not­ing that all lay­offs and shut­downs do not nec­es­sar­ily re­sult in an ab­so­lute and im­me­di­ate shrink­age in the in­dus­try’s over­all em­ploy­ment base or its con­tri­bu­tion to GDP. An al­ter­nate in­fer­ence is that this may more re­al­is­ti­cally re­sult in a re­align­ment of how the sec­tor is choos­ing to or­ga­nize it­self at an ag­gre­gate. This is an ob­vi­ous out­come from the in­evitable - but pro­longed in the lat­est case – cycli­cal­ity ex­pe­ri­enced in global macro-eco­nomic growth; es­pe­cially amidst all the geo-po­lit­i­cal and fi­nan­cial un­cer­tain­ties in the last decade. Fur­ther ac­cen­tu­at­ing the sit­u­a­tion is the new set of chal­lenges be­ing faced around how busi­nesses will be con­ducted in the 21st cen­tury. This is be­cause of ever evolv­ing par­a­digms and in­no­va­tion – from ini­tial dis­cov­ery to even­tual de­liv­ery.

Dooms­day pre­dic­tions apart, it is im­per­a­tive to un­der­stand this new land­scape in a more the­matic man­ner, so that the sec­tor gears up ap­pro­pri­ately to re­spond to such chal­lenges. A cur­sory study of the more re­cent ac­tiv­ity in the Pharma in­dus­try (re­fer: Ta­ble) sug­gests a num­ber of in­ter­est­ing trends.

The chal­lenges have been man­i­fold. A much-feared patent cliff has be­come more of a re­al­ity in re­cent time– re­sult­ing from ex­pir­ing patents without new av­enues of growth open­ing up. Apart from gener­ics man­u­fac­tured in lower cost fa­cil­i­ties flood­ing the mar­ket, there are other in­tel­lec­tual prop­erty chal­lenges as well – es­pe­cially in mar­kets hav­ing less strin­gent IP pro­tec­tion laws and qual­ity con­trol reg­u­la­tions. Fur­ther, there is an in­creased com­pe­ti­tion from new players that have sprung up be­cause of lower bar­ri­ers to en­try in cer­tain busi­ness pro­cesses and ac­tiv­i­ties that sup­port or drive in­dus­try me­chan­ics. All this is lead­ing to ever-shrink­ing mar­gins and mar­ket share, sub­ject­ing the busi­nesses to an al­most in­evitable cost pres­sure.

Fur­ther anal­y­sis also in­di­cates that an evolv­ing, more in­formed and chang­ing client base is an equally emerg­ing re­al­ity, which com­pa­nies need to re­spond to or else face ex­tinc­tion. More­over, in cer­tain ma­ture ju­ris­dic­tions, gov­ern­ments have also be­come in­creas­ingly cog­nizant of the pre­vail­ing is­sues with busi­ness ethics and prac­tices in the sec­tor. They are ap­pro­pri­ately re­spond­ing by hav­ing a hard look front to back - right from reg­u­la­tion and cor­po­rate gov­er­nance prac­tices, to qual­ity con­trol. To fur­ther ac­cen­tu­ate the prob­lem, gov­ern­ment is also in­creas­ingly be­com­ing a ma­jor client and pro­curer, and has there­fore an even big­ger in­flu­ence in how the in­dus­try shapes up.

The in­dus­try is re­spond­ing to these chal­lenges in a num­ber of ways: from con­sol­i­da­tion through op­por­tunis­tic in­or­ganic growth that may be driven by mo­tives as di­verse as culling com­pe­ti­tion, build­ing economies of scale, or sim­ply to re­al­ize cost ad­van­tages

A num­ber of com­pa­nies lack the busi­ness acu­men, or the scale or flex­i­bil­ity, or even in­ten­tion to con­tinue fo­cus­ing on a broader agenda span­ning mul­ti­ple ge­ogra­phies and mar­kets. An in­evitable out­come in such cases is a to­tal shut­down, bank­ruptcy or be­com­ing an ac­qui­si­tion tar­get.

through or­ga­ni­za­tional and re­source ef­fi­cien­cies – in­clud­ing but not lim­ited to re­duced em­ployee base and salary bills, but by also re-skilling or re­plac­ing sales­force that is more suited to cater to the new client base.

Also, com­pa­nies are at­tempt­ing to be­come nim­bler by out­sourc­ing not just their non-core ac­tiv­i­ties, but also the way they build their pipe­line and con­duct busi­nesses. For in­stance, in house R&D is in­creas­ingly get­ting re­placed by ei­ther sup­port­ing in­cu­ba­tion ac­tiv­i­ties with an arm’s length strat­egy, or even out­right ac­qui­si­tions of proven tech­nolo­gies or drugs. This re­duc the ges­ta­tion pe­riod as well as the cost of time to mar­ket. Sim­i­larly, sup­ply chain man­age­ment is be­ing best left to lo­gis­tics ex­perts who are be­com­ing trusted part­ners be­cause of their deep un­der­stand­ing of the do­main and bet­ter and flex­i­ble pric­ing be­cause of the way they are able to ag­gre­gate these ser­vices across in­dus­try.

The Alarm Bell

Over the last sev­eral years, many phar­ma­ceu­ti­cal giants such as Pfizer, Glax­oSmithK­line, and No­var­tis have an­nounced huge lay­offs. Drug dis­cov­ery jobs have di­min­ished on a large scale as the in­dus­try has cut costs in or­der to ad­just to chang­ing drug mar­kets. Com­pa­nies are fac­ing set­back both ways – they have fewer drugs in their prod­uct pipe­lines as well as patents on the big­gest sell­ers are ex­pir­ing. The im­pli­ca­tions for job seek­ers, both laid-off em­ploy­ees and new grad­u­ates, are dire. As the in­dus­try un­der­goes pro­found changes, job seek­ers must adapt, too.

A Dry­ing Pipe­line

To de­velop a new drug, it has to go through a lot of odds – long dis­cov­ery time and costs a lot of money in R&D and man­u­fac­tur­ing. The process in it­self takes on an av­er­age of 12 or 13 years. With chang­ing time and mar­ket, de­vel­op­ing new drugs is get­ting harder. Also, trans­lat­ing break­throughs in new science and tech­nol­ogy into drugs is get­ting dif­fi­cult. Rev­enues, as a re­sult, have also fallen. In­dus­try also seems to have been get­ting close to “the big patent cliff” with the im­mi­nent ex­pi­ra­tion of a large num­ber of patents. This will force drug man­u­fac­tur­ers to come up with cheaper ver­sions of block­buster drugs to sus­tain pres­ence in the mar­ket.

Chang­ing Job Scene

A lag in drug dis­cov­ery process has led ex­perts to be­lieve that the big pharma is stuck. Phar­ma­ceu­ti­cal com­pa­nies have been try­ing to re­struc­ture their or­ga­ni­za­tions for the past sev­eral years, in or­der to make leaner op­er­a­tions through large scale merg­ers and ac­qui­si­tions, riskshar­ing part­ner­ships, clo­sure of en­tire ther­a­peu­tic lines, R&D sites and pro­duc­tion plants. As a re­sult, big pharma is now em­ploy­ing fewer sci­en­tists than be­fore in the West. Chemists have been hit es­pe­cially hard; as the in­dus­try has moved away from small, chem­i­cally de­signed mol­e­cules to­wards large bi­o­logic mol­e­cules. How­ever, these sci­en­tists may find op­por­tu­ni­ties else­where, such as in aca­demic labs, as the in­dus­try has been ramp­ing up part­ner­ships with academia.

Risk of Out­sourc­ing

De­spite huge lay­offs, big pharma still re­mains a sig­nif­i­cant em­ployer – not only in Asia but in other mar­kets as well. How­ever, the in­dus­try is in­creas­ingly look­ing at ways of re­duc­ing costs and its ex­po­sure to op­er­a­tional risk. Ob­servers even be­lieve that small pharma and biotech will be the big­gest area of growth in com­ing years. All things con­sid­ered, some­one’s neme­sis may turn out to be an­other com­pany’s gain, but jobs will nev­er­the­less get ag­gre­gated and moved to ge­ogra­phies with a dis­tinct com­pet­i­tive ad­van­tage when it comes to the costs of do­ing busi­ness. Fur­ther, this phe­nom­e­non is not merely re­stricted to lower end of the value chain or man­u­fac­tur­ing. With the ad­vent of new tech­nol­ogy, even the drug dis­cov­ery process is tak­ing a vir­tual route. An­other way big pharma is re­duc­ing its costs is by working with Clin­i­cal Re­search Or­ga­ni­za­tions (CRO). Out­sourc­ing R&D ac­tiv­i­ties to CROs and off-shoring

Ac­cord­ing to var­i­ous re­ports, it is es­ti­mated that more than 300,000 pharma jobs may have been lost since the start of this cen­tury.

That said, even this may be a very nar­row view fo­cussing solely on num­bers re­ported by the larger players and without nec­es­sar­ily hav­ing fully ac­counted for all re­gional or sec­toral vari­ances. Also, true ac­count­ing for the in­di­rect im­pact this has likely had on the sup­pli­ers and other sup­port­ing in­dus­tries is mostly not con­sid­ered.

other pro­cesses to com­pa­nies in emerg­ing coun­tries such as In­dia and China, are also done as a means of achiev­ing ma­te­rial ef­fi­ciency gains. Col­lab­o­ra­tion be­tween CROs and big pharma is in­deed be­com­ing a re­cur­rent theme.

The new Busi­ness Paradigm

M&A Ac­tiv­i­ties

In the last few years, bio­pharma has been scal­ing back R&D de­part­ments, slash­ing sales teams, and elim­i­nat­ing re­dun­dan­cies in post-merger work­forces. This has re­sulted in a huge elim­i­na­tion of jobs. In­dus­try has been try­ing to cut-down its em­ploy­ment base, and top pharma com­pa­nies have been merg­ing or ac­quir­ing fledg­ling com­pa­nies, with the ob­jec­tive of later slash­ing jobs to re­al­ize syn­er­gies from such deals. Merg­ers and ac­qui­si­tions por­tends job cuts to achieve ef­fi­cien­cies. Along with the bio­pharma M&A ac­tiv­ity on the rise, merger-re­lated lay­offs will in­evitably grow. The prob­lem with these job cuts is that it is un­clear ex­actly where these lay­offs might hap­pen. Also, some firms use M&A ac­tiv­i­ties as an op­por­tu­nity to down­size cer­tain parts of its work­force.

Dif­fer­ent Skills for a changed Mar­ket Re­al­ity

Over the last decade or so, sales force has faced a ma­jor reck­on­ing as a re­sult of com­pany re­struc­tur­ing. Some of the cut-downs is jus­ti­fied by patent ex­piry of ma­jor med­i­ca­tions. Fur­ther­more, in­creased scru­tiny of mar­ket­ing ethics is also lead­ing to a per­cep­ti­ble drop in the phar­ma­ceu­ti­cal sales force. In the past, physi­cians used to have more con­trol over what to pre­scribe to pa­tients, which re­sulted in a mas­sive sales force fo­cussed on di­rect sales and dis­tri­bu­tion of such prod­ucts to physi­cians. Pharma cus­tomers have changed dra­mat­i­cally how­ever, and are more so­phis­ti­cated, aware and in­ter­ested with a large foot­print and more ac­tive in­volve­ment.

This shift in the payer and pre­scriber ground has there­fore prompted bio­pharma mar­ket­ing teams to change their strate­gies. Pay­ers and gov­ern­ment en­ti­ties are also play­ing a role in this shift with their health care re­forms.

Pipe­line Ac­qui­si­tions

For more than a decade, R&D in­vest­ment in the in­dus­try has been rel­a­tively flat. This is why, in-house R&D op­er­a­tions at big pharma com­pa­nies like As­traZeneca, Al­ler­gan, No­var­tis, Glax­oSmithK­line, Am­gen and other big pharma com­pa­nies have be­come a tar­get of job cuts.

In try­ing to ac­quire a new pipe­line, com­pa­nies have two choices – ei­ther spend their re­sources in R&D, or ac­quire pipe­line. And more of­ten, sus­tain­ing a large R&D func­tion looks like a vain in com­par­i­son to ac­quir­ing a new pipe­line.

Fur­ther, many com­pa­nies are also ex­plor­ing the pos­si­bil­ity of strik­ing deals or li­cens­ing ar­range­ments, with the ob­jec­tive to piggy-back ex­ist­ing or in­de­vel­op­ment drugs. In other cases, R&D cuts may re­sult in the sci­en­tific fa­cil­i­ties get­ting moved to biotech parks or such hubs that pro­vide tax breaks or fi­nan­cial in­cen­tives from par­tic­i­pat­ing gov­ern­ments that are try­ing to pro­mote them.

Where will this lead?

All this is of course an at­tempt to re-align, with an in­ten­tion to sur­vive the new busi­ness re­al­ity. How­ever, a num­ber of com­pa­nies lack the busi­ness acu­men, or the scale or flex­i­bil­ity, or even in­ten­tion to con­tinue fo­cus­ing on a broader agenda span­ning mul­ti­ple ge­ogra­phies and mar­kets. An in­evitable out­come in such cases is a to­tal shut­down, bank­ruptcy or be­com­ing an ac­qui­si­tion tar­get. Ev­ery­one is spec­u­lat­ing as to when this cri­sis will end for good, although no one can be sure.

There are some en­cour­ag­ing signs how­ever. FDA re­cently an­nounced that it has given the green light to 35 new drugs never ap­proved be­fore for the US mar­ket -the sec­ond high­est num­ber of ap­provals in over a decade. This has been made pos­si­ble partly due to an ac­cel­er­ated ap­proval process. Still, it is a wel­come cush­ion for com­pa­nies with patents ex­pir­ing in the near fu­ture.

Priyanka Ba­j­pai priyanka.ba­j­pai@mmac­tiv.com

De­spite huge lay­offs, big pharma still re­mains a sig­nif­i­cant em­ployer – not only in Asia but in other mar­kets as well. How­ever, the in­dus­try is in­creas­ingly look­ing at ways of re­duc­ing costs and its ex­po­sure to op­er­a­tional risk. Ob­servers even be­lieve that small pharma and biotech will be the big­gest area of growth in com­ing years.

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