Wednesday, December 1, 2010

Pharma's woes not over, more restructuring seen-"Earnings don't produce revenue. Revenue produces earnings," he said. Sun Nov 28, 2010

Analysis: Pharma's woes not over, more restructuring seen

By Esha Dey

NEW YORK | Sun Nov 28, 2010 9:52pm IST

NEW YORK (Reuters) - 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 percent 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 organizations.

More recently, Switzerland's Roche Holding AG announced plans to cut 4,800 jobs, or 6 percent 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 percent of U.S. sales, but can be 90 percent or more once multiple generics are available.

In their latest quarter, Pfizer, AstraZeneca, Eli Lilly, GlaxoSmithKline and Roche reported sales that were hurt by generics and their shares fell, signaling 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 percent since October 20, compared with a 1.9 percent 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.

PATENT CLIFF JOURNEY

Analysis: Pharma's woes not over, more restructuring seen






By Esha Dey

NEW YORK | Sun Nov 28, 2010 9:52pm IST

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 percent 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 percent by 2014.

Drugmakers are also facing greater pricing pressure due to more recent developments, such as a new U.S. 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.

"Low productivity of internal research and development has rendered the drugmakers inadequately prepared for the patent cliff," Argus Research Co analyst Patrick Cheng said.

AstraZeneca, which reported a 4 percent drop in quarterly sales late last month, said it was not done with cost cuts.

"You'll continue to see us reallocate marketing and sales resources," Astra CEO David Brennan told the Reuters Health Summit.

Germany's Bayer also announced a cost- and job-cut plan, and Pfizer recently said it expects to exceed its original target of a 15 percent workforce reduction related to its $67 billion purchase of rival Wyeth.

Many analysts say drugmakers have no choice but to get even leaner, though research and innovation are essential in the long run.

"Most of these big companies have a lot of middle management; that is one area that they could focus on for further savings," Hapoalim Securities analyst Jon Lecroy said.

At the same time, cost cuts alone is not a strong sell when it comes to Wall Street.

"The industry is still trying to cost cut its way to intermediate terms of success," Fred Frank, a biotechnology banker and vice chairman of investment advisory firm Peter J. Solomon Co said, adding that was not a sustainable trend.

"Earnings don't produce revenue. Revenue produces earnings," he said.

(Reporting by Esha Dey; Editing by Michele Gershberg and Tim Dobbyn)

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