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Cover Story

December 3, 2007
Volume 85, Number 49
pp. 30-32

Drug Companies Cut Costs

In the midst of rapidly changing global markets, firms aggressively reduce spending to protect profitability

Susan J. Ainsworth

This year, pharmaceutical companies have wielded cost-cutting measures like a powerful weapon to combat antagonistic pressures that threaten to ravage their profitability.

The industry's focus on cost reduction, which gained a lot of momentum in 2007, is interesting in that it lags efforts by almost any other industry, observes Jeff Steinberg, global risk advisory services leader for the pharmaceutical sector at Ernst & Young. Because the drug industry long enjoyed enviable annual revenue growth rates of 15–20%, costs were not as much of a concern, he points out.

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"But the game has changed," Steinberg says. "Now in a period of slow or no revenue growth, pharmaceutical companies have to focus on the other side of the equation in order to boost earnings and meet shareholder expectations. They are focusing in a big way on how to cut costs in many areas of their businesses."

And it's working. Pharma companies "have demonstrated a greater-thanexpected ability" to offset product losses due to patent expirations with adjustments to their cost structures, says Bank of America analyst Christopher T. Schott. As a result, he now believes that despite the continued cycle of patent expirations, pharma margins will gradually increase over the next several years from the trough in 2005.

Although most major pharmaceutical companies are making cuts, they are "attacking the problem in very different ways depending on their situation," says Dave DeMarco, global account leader at Ernst & Young's Global Pharmaceutical Center. "Some are simply tightening their belts while others are taking a very bold transformational approach, looking at how to change the way they do business and take costs out at the same time."

In January, for example, Pfizer launched an extensive restructuring plan that included the elimination of 10,000 jobs and the closing of manufacturing and research facilities globally. "We said we would get leaner and quicker and do it with a sense of urgency and intensity," Pfizer Chairman and Chief Executive Officer Jeffrey Kindler said in a midyear statement. "We acknowledged that the health care industry is changing, and we are committed to changing with it," including establishing a lower and more flexible cost base.

Several other companies announced similar movesthis year. For example, this past summer Johnson & Johnson said it would cut 3???4% of its workforce and consolidate sites in order to reduce costs and improve profitability. Bristol-Myers Squibb said it plans to provide details of job cuts and facilities closures this week. And as part of their own streamlining efforts, Abbott Laboratories and AstraZeneca unveiled plans earlier this year to slash jobs.

To drive these aggressive cost-cutting initiatives, many companies have brought in fresh management. "I think you'd be hard-pressed to find a year with more turnover of CEOs, chief financial officers, chief R&D officers—all the top people in the organization," Steinberg says.

In the CEO camp, this past spring Bristol-Myers Squibb elected James Cornelius as its CEO after he had served as interim CEO for eight months. Two months ago, GlaxoSmithKline picked Andrew Witty, the president of its European pharmaceutical business, as its new CEO, effective May 2008. He will succeed Jean-Pierre Garnier, who is retiring. In September, Wyeth named Bernard Poussot as its new CEO, effective Jan. 1, 2008. Formerly the company's president and vice chairman, he is replacing the retiring Robert Essner.

CFO turnover has been high as well. In June, Wyeth promoted Greg Norden to CFO from the position of executive vice president and CFO at its division Wyeth Pharmaceuticals. During the summer, Peter N. Kellogg, former executive vice president and CFO at Biogen Idec, stepped into the CFO role at Merck, which was vacated by Judy Lewent, who retired after 17 years in the position.

In the R&D realm, Pfizer named Martin Mackay as its new president of Pfizer Global Research & Development to replace John LaMattina, who announced his retirement earlier this year.

Although many of the new top leaders have come from within the industry ranks, there seems to be a growing interest in bringing in management from outside the pharmaceutical industry, Steinberg observes. For example, at Pfizer, Frank A. D'Amelio, who has almost three decades of operating and financial experience at AT&T, Lucent Technologies, and Alcatel-Lucent, became senior vice president and CFO. He took the office in mid-September, following the resignation of Alan Levin in May.

D'Amelio has been "a senior executive in global companies undergoing the kind of rapid and complex changes we have undertaken at Pfizer in response to our rapidly changing markets," Kindler said in announcing the appointment. "I am confident that he will bring valuable new perspectives and financial strategies as we continue to respond aggressively to our challenges and opportunities."

Steinberg conjectures that the industry recognizes it has been "somewhat inbred until now," and it may need to "bring in people from outside the company and the industry who have experience dealing with some of these challenges that pharma is just now having to address."

The necessity of outsourcing and offshoring, for example, is something that many other industries have been dealing with for quite some time but one that drug companies are just beginning to focus on. AstraZeneca has unveiled plans to eventually outsource all of its manufacturing. As part of that plan, it is looking increasingly to chemical production partners in China and India.

Other companies are looking for ways to simply cut the costs associated with manufacturing their final drug products. For example, in September, Novartis launched a $65 million, 10-year research collaboration with Massachusetts Institute of Technology to develop new technologies that could replace the conventional batch system of pharmaceutical manufacturing with continuous manufacturing.

In today's hostile market environment, drug firms can ill afford to leave any stone unturned when it comes to cost-cutting. "These companies are now working very hard to live in a new world," Steinberg observes. "They realize that they're not in Kansas anymore."

Cover Story

  • Pharma Adapts
  • Firms invent new strategies to deflect generic competition and stem growing safety concerns
  • Drug Companies Cut Costs
  • In the midst of rapidly changing global markets, firms aggressively reduce spending to protect profitability.
  • Empowering FDA
  • A new law gives more powers to the regulatory agency and will impact the drug industry for years.

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Cover Story

  • Pharma Adapts
  • Firms invent new strategies to deflect generic competition and stem growing safety concerns
  • Drug Companies Cut Costs
  • In the midst of rapidly changing global markets, firms aggressively reduce spending to protect profitability.
  • Empowering FDA
  • A new law gives more powers to the regulatory agency and will impact the drug industry for years.