One of my favorite quotations has always been from George Santayana, “Those who do not remember the past are condemned to repeat it.” You may ask why am I suddenly so philosophical?
Well, while preparing to write this blog (yes, contrary to popular belief, I do research for my blogs, it’s not all just flow of consciousness) I googled “pharmaceutical companies issues” and received back the usual gazillion replies.
As I started to go through the list one by one from the top (I really hope that my readers, assuming I have any, appreciate what I do for them) I noticed two things.
First, we’re not alone. The topics that we’ve been blogging about for several years now, declining profits, stagnating product pipelines, and an industry in crisis are being written about by many people. And they’re writing a lot.
Next, and this surprised me, people have been writing about this for a long time. I mean years.
Larry and I have been talking about these issues for a while now. But, it was only about when we started this blog that our thinking began to coalesce around these issues. But, there were people out there before us. Long before us.
One writer in particular, Bianca Piachaud, wrote a particularly good article (http://findarticles.com/p/articles/mi_m2242/is_1634_280/ai_85370544/?tag=content;col1 ) all the way back in March 2002 for Contemporary Review on the issues facing the pharmaceutical industry which is still relevant today. Think about that. That’s over eight years ago!
Dr. Piachaud made one particularly prescient observation that the past eight years has borne out. She noted that the unsustainability (I may have made up a word here) of pharmaceutical profits because of increasing competition from generics, government policies, and the increasing costs of finding new drugs. There is even a reference to the cost cutting programs being put into place (and which may have gotten some pharmaceutical companies into recent trouble) to try to fend off the inevitable.
I also found in this article, the first rational explanation of why the product pipelines are stagnating. Dr. Piachaud highlights the increasing diminishing returns from research as technology with its costs becomes a larger part of the work undertaken. She also notes the contributions of administrative inefficiencies and increasing bureaucracy (think of Sarbanes-Oxley and healthcare compliance costs) in lowering profits.
The unsettling aspect of Dr. Piachuad’s article is that there doesn’t appear to be any good news soon for the pharmaceutical industry. We may be moving through the middle game preparing for the end game.
Dr. Piachuad has a doctorate from the Aberdeen Business School, the Robert Gordon University, Aberdeen. She is also has written Outsourcing of R&D in the Pharmaceutical Industry published by Macmillan (http://us.macmillan.com/author/biancapiachaud ).
As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.
Contributed by Guy de Lastin
Monday, May 31, 2010
Saturday, May 29, 2010
Pharmaceuticals - How Much Excess Capacity Is Too Much?
Scanning news headlines earlier this week, I came across an article about Pfizer (PFE) laying off another 6,000 employees as part of its post-Wyeth acquisition cost cutting program. (See Melly Alazraki’s blog at http://www.dailyfinance.com/story/company-news/pfizer-plans-manufacturing-job-cuts/19481620/ .) Being a curious sort of guy, I went onto Google and searched for references to Pfizer layoffs. I found many other links to layoffs all over the world. Durham, NC; NYC; Plattsburgh, NY; Collegeville, PA; Ireland; and Puerto Rico were just a few of the locations that I found where layoffs were taking place.
Pfizer originally announced layoffs approximating 20,000 jobs from its Wyeth acquisition. (http://blogs.wsj.com/health/2009/10/15/pfizer-wyeth-deal-wraps-up-layoffs-to-follow/ ) This week’s announcement in addition to the layoffs announced eight plant closures and reduced operations in six others. (http://www.thestreet.com/story/10759832/1/pfizer-wyeth-combo-leads-to-more-layoffs.html?puc=tscmarketwatch&cm_ven=tscmarketwatch ) Obviously, a lot of extra capacity is being wrung out of the industry. Which could make one wonder what sort of career opportunities might exist in pharmaceuticals in the future?
Clifford S. Mintz, otherwise known as the BioJobBlogger (http://www.biojobblog.com/promo/about/ ) has written a very interesting and relevant blog (http://www.biojobblog.com/2009/11/articles/biojobbuzz/pfizerwyeth-layoff-update/ ) about what’s been happening in the pharmaceuticals industry. He maintains that the traditional vertically integrated industry model is coming to an end with new drug development coming from outside Big Pharma with only marketing and distribution functions remaining.
The points made are good ones. Previous blogs here have echoed similar feelings. What I can’t stop thinking about is where does this all lead? Recent history has taught us that the twin phenomena of the twenty-first century, globalization and the Internet, are driving out middlemen. I remember my old Economics 101 professor teaching that perfect markets require perfect knowledge resulting in zero profits. (Professor, apologies, it’s been more years than I care to remember. All errors in restating your lectures are my fault.) Aren’t the pharmaceutical companies transforming themselves into middlemen?
In my simplistic view of the world, there will be manufacturers and sellers. In order to survive middlemen will have to become large enough to take advantage of economies of scale. There probably won’t be a need for many players in this space. In fact, economic reality may dictate that will only be a small number of global players. (Oligopoly, anyone?)
Consolidation and closure of manufacturing plants with the consequential elimination of jobs is a sure sign of excess capacity in an industry. And, once those plants and jobs are gone, they won’t be coming back any time soon, particularly in the United States. Here’s why. Given local zoning and environmental ordinances in many American communities, building and running a modern manufacturing plant is an expensive and time consuming proposition.
I’ll continue to follow this theme going forward. I suspect that we’ll see more signs of an industry undergoing consolidation.
As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.
Contributed by Guy de Lastin
Pfizer originally announced layoffs approximating 20,000 jobs from its Wyeth acquisition. (http://blogs.wsj.com/health/2009/10/15/pfizer-wyeth-deal-wraps-up-layoffs-to-follow/ ) This week’s announcement in addition to the layoffs announced eight plant closures and reduced operations in six others. (http://www.thestreet.com/story/10759832/1/pfizer-wyeth-combo-leads-to-more-layoffs.html?puc=tscmarketwatch&cm_ven=tscmarketwatch ) Obviously, a lot of extra capacity is being wrung out of the industry. Which could make one wonder what sort of career opportunities might exist in pharmaceuticals in the future?
Clifford S. Mintz, otherwise known as the BioJobBlogger (http://www.biojobblog.com/promo/about/ ) has written a very interesting and relevant blog (http://www.biojobblog.com/2009/11/articles/biojobbuzz/pfizerwyeth-layoff-update/ ) about what’s been happening in the pharmaceuticals industry. He maintains that the traditional vertically integrated industry model is coming to an end with new drug development coming from outside Big Pharma with only marketing and distribution functions remaining.
The points made are good ones. Previous blogs here have echoed similar feelings. What I can’t stop thinking about is where does this all lead? Recent history has taught us that the twin phenomena of the twenty-first century, globalization and the Internet, are driving out middlemen. I remember my old Economics 101 professor teaching that perfect markets require perfect knowledge resulting in zero profits. (Professor, apologies, it’s been more years than I care to remember. All errors in restating your lectures are my fault.) Aren’t the pharmaceutical companies transforming themselves into middlemen?
In my simplistic view of the world, there will be manufacturers and sellers. In order to survive middlemen will have to become large enough to take advantage of economies of scale. There probably won’t be a need for many players in this space. In fact, economic reality may dictate that will only be a small number of global players. (Oligopoly, anyone?)
Consolidation and closure of manufacturing plants with the consequential elimination of jobs is a sure sign of excess capacity in an industry. And, once those plants and jobs are gone, they won’t be coming back any time soon, particularly in the United States. Here’s why. Given local zoning and environmental ordinances in many American communities, building and running a modern manufacturing plant is an expensive and time consuming proposition.
I’ll continue to follow this theme going forward. I suspect that we’ll see more signs of an industry undergoing consolidation.
As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.
Contributed by Guy de Lastin
Monday, May 10, 2010
“The 4E Principal” for Determining an Outsourcing Partner
As a member of the Scientific Advisory Board of Sciformix (www.sciformix.com), the management team thought it would be useful if we were to describe the case for doing business with their company, the value proposition and the practical reasons that accounts for the success of their business. I thought it may be useful to our readership to republish this and share some of our thoughts.
Describing why outsourcing/out-tasking is such a huge success is a straightforward challenge. It is rooted far more deeply than labor arbitrage which is the core reason most companies choose to use an outsourcing “partner”. There are unprecedented shifts in the way Bio-pharmaceutical companies are conducting their business today, partially forced by macroeconomics, politics, population growth and aging and the “flattening” of the globe that provides opportunity and challenge unknown before today.
There is an enormous pressure on management to perform the concurrent miracle of significant cost reductions coupled with simultaneous productivity improvements in order to thrive in our business. While workloads are inexorably increasing, there are daily headlines describing massive layoffs and facility closings in our industry. No corner of the business, regardless of the geography is immune from these pressures.
One of the few growth areas for budgets is the amount of outsourcing/out-tasking/off shoring that the Bio-Pharmaceutical Industry has undertaken. While the industry has been late out of the starting blocks, the lost time is being rapidly made up. Variations on the theme are diverse and include captive centers, joint ventures with global outsourcing companies, the major expansion of use of Clinical Research Organizations (CRO's), use of diverse geographies and any other creative aspects companies can create.
Our point here is to outline four key areas of consideration for outsourcing the drug safety and adjacent functions to a company such as Sciformix. We call it “The 4E Principal” which encompasses the “whys” of doing business together, each company's priorities will differ. The 4E's are Effectiveness, Efficiency, Economics and Employees and we will describe what we mean by each of these:
Effectiveness: In the area of drug safety, effectiveness encompasses results that are of high quality, compliant with appropriate regulations, consistent from batch to batch and well documented. With the large variation in the number and kind of testing that needs to be done and the education updates that are required, it is a significant challenge for the sponsor company to comply effectively. As Sciformix is focused on this area, day after day, the effectiveness we bring to your company is likely to be significantly better than you experience today.
Efficiency: Ideally your lab is running at or near 100%, however the reality is such that “peaks and valleys” are the norm profoundly impacting productivity and increasing unit costs. As a specialized outsourcing partner, companies such as Sciformix provide a predictable, attractively priced alternative to the classic in house staff-many companies tend to adapt a hybrid model that couples both in house expertise with external capability and bandwidth.
Economics: The economics of external drug safety capability are driven by labor arbitrage, that is to say that if external costs are less than 50% of that of in house capability and quality is equal to or better than current models, than the decision is very straightforward. As with investment policies in the financial world, 90% of the value is achieved with the initial decision, further incremental economic benefits are possible, but not as compelling once the major decision to go external is made. Currently, Sciformix can demonstrate cost benefits of greater than 50% compared with either in house or on shore based providers while providing a superior result.
Employees: The key driver for having an external provider for drug safety functions is based on the cost and upkeep of employees-including non-productive time, continuing education, vacations, holidays, benefits, etc. all of which add up to high overhead costs that are virtually eliminated when working with Sciformix.
Describing why outsourcing/out-tasking is such a huge success is a straightforward challenge. It is rooted far more deeply than labor arbitrage which is the core reason most companies choose to use an outsourcing “partner”. There are unprecedented shifts in the way Bio-pharmaceutical companies are conducting their business today, partially forced by macroeconomics, politics, population growth and aging and the “flattening” of the globe that provides opportunity and challenge unknown before today.
There is an enormous pressure on management to perform the concurrent miracle of significant cost reductions coupled with simultaneous productivity improvements in order to thrive in our business. While workloads are inexorably increasing, there are daily headlines describing massive layoffs and facility closings in our industry. No corner of the business, regardless of the geography is immune from these pressures.
One of the few growth areas for budgets is the amount of outsourcing/out-tasking/off shoring that the Bio-Pharmaceutical Industry has undertaken. While the industry has been late out of the starting blocks, the lost time is being rapidly made up. Variations on the theme are diverse and include captive centers, joint ventures with global outsourcing companies, the major expansion of use of Clinical Research Organizations (CRO's), use of diverse geographies and any other creative aspects companies can create.
Our point here is to outline four key areas of consideration for outsourcing the drug safety and adjacent functions to a company such as Sciformix. We call it “The 4E Principal” which encompasses the “whys” of doing business together, each company's priorities will differ. The 4E's are Effectiveness, Efficiency, Economics and Employees and we will describe what we mean by each of these:
Effectiveness: In the area of drug safety, effectiveness encompasses results that are of high quality, compliant with appropriate regulations, consistent from batch to batch and well documented. With the large variation in the number and kind of testing that needs to be done and the education updates that are required, it is a significant challenge for the sponsor company to comply effectively. As Sciformix is focused on this area, day after day, the effectiveness we bring to your company is likely to be significantly better than you experience today.
Efficiency: Ideally your lab is running at or near 100%, however the reality is such that “peaks and valleys” are the norm profoundly impacting productivity and increasing unit costs. As a specialized outsourcing partner, companies such as Sciformix provide a predictable, attractively priced alternative to the classic in house staff-many companies tend to adapt a hybrid model that couples both in house expertise with external capability and bandwidth.
Economics: The economics of external drug safety capability are driven by labor arbitrage, that is to say that if external costs are less than 50% of that of in house capability and quality is equal to or better than current models, than the decision is very straightforward. As with investment policies in the financial world, 90% of the value is achieved with the initial decision, further incremental economic benefits are possible, but not as compelling once the major decision to go external is made. Currently, Sciformix can demonstrate cost benefits of greater than 50% compared with either in house or on shore based providers while providing a superior result.
Employees: The key driver for having an external provider for drug safety functions is based on the cost and upkeep of employees-including non-productive time, continuing education, vacations, holidays, benefits, etc. all of which add up to high overhead costs that are virtually eliminated when working with Sciformix.
Saturday, May 8, 2010
Pharmaceuticals – Under Siege?
Lately, I’ve been blogging about the general malaise that life sciences, and in particular, Big Pharma, are finding themselves in. Last week, I even compared poor Mike Huckman to a canary in a mine. (Apologies there, it seemed like a good idea at the time.)
The recent full court press by the Federal government against Goldman Sachs, first a civil suit, then a criminal investigation, got me wondering what the Beltway Gang was up to with their another one of their favorite bête noirs, Big Pharma. Seems that the Federal Drug Administration (FDA) has decided to breathe new life into its Office of Criminal Investigations. A recent article by Alicia Mundy in the Wall Street Journal (http://online.wsj.com/article/SB10001424052748703862704575099942109582112.html ) outlines the FDA’s plans to re-energize itself and the focus of its prosecutions.
Are we seeing yet more evidence of an industry under siege? There’s definitely a more activist administration in Washington, D.C. these days. And Big Pharma has all the characteristics of a great target. Unpopular with the public, aging business model in need of an overhaul, and recipients of large amounts of public largess (i.e., Medicare). Makes me think of the financial services industry. I wonder if we’re going to see Big Pharma’s chairpersons appearing before Congress en masse anytime soon?
But, maybe we won’t see everyone trooping down to the Capitol anytime soon. Here’s why. First, Congress is enjoying themselves too much with the financial services industry. (Big Pharma should consider themselves fortunate in not having a poster child for egregious behavior like Bernie Madoff.) Next, Big Pharma hasn’t provided a lightning rod for public outrage yet. Sure, they’ve had the occasional Vioxx but they haven’t tried to melt down the economy or anything comparable yet.
In ancient China, there was a form of execution cum torture known as the death by a thousand cuts. I won’t go into the details (there are other blogs for that) but you get the idea. This is what Big Pharma is experiencing now. Every day seems to bring another cut/issue. Nothing big by itself but cumulatively they have an effect. Resources are drawn away from things like research and development. Innovation is throttled because of a risk adverse culture developing. Management attention is distracted from running the day to day business let alone forward looking strategic planning.
Once upon a time, Big Pharma was one of the glamour industries. Overtime, they became one of the last men standing. Now, Big Pharma is on the cusp of being another also ran. Globalization and commoditization are bringing down another industry.
I’ll continue to pursue this line for awhile. Unfortunately, I don’t see any significant changes anytime soon.
As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.
Contributed by Guy de Lastin
The recent full court press by the Federal government against Goldman Sachs, first a civil suit, then a criminal investigation, got me wondering what the Beltway Gang was up to with their another one of their favorite bête noirs, Big Pharma. Seems that the Federal Drug Administration (FDA) has decided to breathe new life into its Office of Criminal Investigations. A recent article by Alicia Mundy in the Wall Street Journal (http://online.wsj.com/article/SB10001424052748703862704575099942109582112.html ) outlines the FDA’s plans to re-energize itself and the focus of its prosecutions.
Are we seeing yet more evidence of an industry under siege? There’s definitely a more activist administration in Washington, D.C. these days. And Big Pharma has all the characteristics of a great target. Unpopular with the public, aging business model in need of an overhaul, and recipients of large amounts of public largess (i.e., Medicare). Makes me think of the financial services industry. I wonder if we’re going to see Big Pharma’s chairpersons appearing before Congress en masse anytime soon?
But, maybe we won’t see everyone trooping down to the Capitol anytime soon. Here’s why. First, Congress is enjoying themselves too much with the financial services industry. (Big Pharma should consider themselves fortunate in not having a poster child for egregious behavior like Bernie Madoff.) Next, Big Pharma hasn’t provided a lightning rod for public outrage yet. Sure, they’ve had the occasional Vioxx but they haven’t tried to melt down the economy or anything comparable yet.
In ancient China, there was a form of execution cum torture known as the death by a thousand cuts. I won’t go into the details (there are other blogs for that) but you get the idea. This is what Big Pharma is experiencing now. Every day seems to bring another cut/issue. Nothing big by itself but cumulatively they have an effect. Resources are drawn away from things like research and development. Innovation is throttled because of a risk adverse culture developing. Management attention is distracted from running the day to day business let alone forward looking strategic planning.
Once upon a time, Big Pharma was one of the glamour industries. Overtime, they became one of the last men standing. Now, Big Pharma is on the cusp of being another also ran. Globalization and commoditization are bringing down another industry.
I’ll continue to pursue this line for awhile. Unfortunately, I don’t see any significant changes anytime soon.
As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.
Contributed by Guy de Lastin
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