Big Pharma – When Will the Music Stop?

My recent blog series on Barron’s article on Big Pharma (The article is available online only for subscribers, a short preview is available at http://online.barrons.com/article/SB50001424052970203296004575320891909686872.html .) got me thinking about what’s going on with Big Pharma. Looking at the company level gives one picture, the day to day struggles of individual companies. Sometimes looking at that level misses the bigger picture.

Stepping back from the company, we arrive at a level where the seismic forces at play with Big Pharma can be observed. Geologists are fond of saying that North America and Europe are slowly moving towards each other again. And, if we all live long enough, say a couple of hundred million years give or take, then we can see it. (Larry won’t be able to get all those frequent flyer miles anymore.) Fortunately, or unfortunately if you’re either Big Pharma management or its shareholders, we’re not going to have wait nearly as long to see the end results in the pharmaceutical industry.

Whatever comes out of this process on the other end will be very different from what came in at the beginning. I’m predicting the end of Big Pharma. Yep, you heard it here first folks. Big Pharma is going away. No, pharmaceutical companies will still be around. But, the corporate behemoths that strode the Earth invoking hope and fear among all who laid eyes on them will be gone like the Olympic gods of yesterday.

I have two observations about this.

First, many are still in denial about what’s going on. Like Andrew Bary in his Barron’s article, they’re not seeing the big picture. Moody’s recent downgrading of its earnings expectations to negative for Eli Lilly (http://www.fiercepharma.com/story/moodys-cuts-outlook-eli-lilly-negative/2010-05-24 ) recognizes the current problem but still misses the future ones. The myth of long term earnings improvements is based on the myth of the future drug pipeline. It never ends! Whatever happened to provocative business journalism and rigorous financial analysis?

Next, what replaces Big Pharma? I still believe that fragmentation and geographic dispersal will result from the changes that are underway. There is historical precedent for this. Remember IBM and DEC? Once upon a time they dominated the computer industry. In fact for one brief, shining moment, IBM had it all. Then the personal computer and local area networks came along and, poof, the magic was gone. Not only that, but many of the personal computer players came and went even more quickly. And, now? Now, Lenovo sits in China with the remnants of IBM’s personal computer division. All that in about a generation.
Take a look at a blog (http://stocks.investopedia.com/stock-analysis/2010/playing-big-pharma-with-cros-crl-prxl-ppdi-mrk-kndl-cvd-iclr0706.aspx ) about contract research organizations (CRO’s) that I’ve come across recently and you may see some of the same trends unfolding with pharmaceuticals.

So, how long do you think it will be before some of those big, corporate campuses owned by Big Pharma in New Jersey are going to be subdivided and leased out to the start-ups of their now unemployed corporate occupants?

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

Big Pharma – Corruption? Say It Ain’t So

To prepare for these blogs, I do research. That’s a fancy way of saying that I sit in front of my laptop and do a lot of Google searches (my preferred engine of choice). And, I’m noticing a few things lately.

First, there’s not a lot of good news out there for Big Pharma. OK, sure there’s a lot of marketing hype and spin meistering going on but not any really positive trends. Talk about biotechnology and its promise but not much on delivering on those promises.

Second, the usual bad news stories, patent expiration, generic competition, cost models out of whack, diminishing pipelines, and I’m sure I missed a few are still there. These stories go back for years, the beginning of the decade in some cases with more coming every year.

So imagine my chagrin when I came across a recent article from Natural News written by David Gutierrez posted on Kevin Trudeau’s website (http://www.ktradionetwork.com/health/who-issues-warning-about-big-pharma-corruption/ ) discussing the release of a fact sheet from the World Health Organization (WHO) discussing corruption and unethical practices in the pharmaceutical industry. These guys just can’t catch a break.

We seem to be moving from a period of public perception of an industry under siege to one that’s preying on the public. I suspect that except for BP’s current contribution to the public image of multinational corporations, Big Pharma might be getting more heat than they have been lately.

Now, let’s get back to that WHO report. WHO Fact Sheet No. 335 was first released back in December 2009. The actual report can be viewed at http://www.who.int/mediacentre/factsheets/fs335/en/index.html . The authors looked at what they call the medicines chain which included all steps in the development, marketing, and consumption of drugs and they claim that there is corruption in every step of the chain. In fact, they’ve included a pretty nifty chart (http://www.who.int/mediacentre/factsheets/images/medicines_20091209.gif ) diagramming each of those steps and the corresponding types of corruption that occur. (Rest assured, there will be future blogs about what’s going on here.)

The fact sheet states that all countries regardless of their developed status have issues. Developed countries are estimated to lose $23 billion US annually to dishonest healthcare practices. Certain practices would seem to lend themselves to certain countries and companies. I’ll hazard a guess and say that research and development and clinical trial fraud are probably more likely in the developed countries where much of this work occurs than with the less developed ones. Likewise, counterfeit drugs are a bigger for less developed countries lacking the necessary infrastructure to examine the drugs. And, I’m sure there are examples which contradict both scenarios.
In closing, I’m getting the sense that Big Pharma’s troubles are far from over and if anything they’re entering a new stage which may presage new ones coming 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

A Shot Across the Bow III

This week, I’ll be finishing my commentary on Andrew Bary’s recent cover story in Barron’s (The article is available online only for subscribers, a short preview is available at http://online.barrons.com/article/SB50001424052970203296004575320891909686872.html .) about the future prospects for drug stocks.

I started this series of blogs because after reading the article for the first time I was astonished at the lack of analysis of what simply appeared to be regurgitations of pharmaceuticals’ public relations flacks. The other interesting aspect of the article is the long term view that I takes. When the dates that Andrew is writing about finally come around no one’s going to remember either this article or him. I wish I could get writing gigs like that.

Last time I left off just as Andrew was about to tackle Roche. He quotes unnamed “bulls” as saying that this company has the best potential of the nine companies he’s writing about. He assumes the stock could rise 30% simply from earnings growth in the next several years. OK, why? Or, better yet, given all that we know that is out there working against this industry why should we expect earnings to simply “increase”? Especially since maybe $1 billion in annual revenues could be at risk if the FDA reconsiders its previous approval of the breast cancer drug Avastin. Check out the Bloomberg Businessweek article for more details (http://www.businessweek.com/news/2010-07-16/roche-avastin-trials-not-as-good-as-early-tests.html ).

Next up, Andrew tackles GlaxoSmithKline. This one is going to be easy. (You can tell that I’m enjoying this can’t you?) Now, Andrew couldn’t have known that the Avandia story (http://www.cbsnews.com/8301-504763_162-20010767-10391704.html ) would have broken so soon after he wrote his article. In fairness, his comments about the drug are probably his most insightful in the entire article. But, once again, he misses the obvious to follow lemming-like the unnamed bulls that he appears to be so enamored with. What gives here?

Andrew reviews three more companies in his article, Lilly, Bristol Meyers Squibb, and Astra-Zeneca. I won’t prolong the torture by going through these one by one. But, the same themes are there. A long term look at 2015, the current dividends are good, or yeah, there’re problems but there’s always tomorrow. (I’m expecting Annie to get some credits here.) Can this guy really believe all this?

I think Barron’s and Andrew really missed an opportunity here. I’m also disappointed with Barron’s, they typically run tougher pieces that challenge the conventional thinking.

It’s not like this hasn’t happened before in the U.S. economy. The auto and banking industries are good current examples. The personal computer industry is a slightly older example and the mainframe computer industry in the Sixties is another good example. How many of you out there remember Snow White and the Seven Dwarves? (Larry will tell you, I’m a serious student of history.)

One more thing, I’ll take a look back on this article in 2015 and see just well Andrew called this one.

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

A Shot Across the Bow II

This week, I’ll be continuing my commentary on Andrew Bary’s recent cover story in Barron’s (The article is available online only for subscribers, a short preview is available at http://online.barrons.com/article/SB50001424052970203296004575320891909686872.html .) about the future prospects for drug stocks.

I have taken a somewhat contrarian position to Andrew’s. Here are the rest of my comments.

Andrew chides the bears’ position about drug stocks and then proceeds to review a number of pure drug play stocks. Along the way he nods toward the bulls by telling them to take Warren Buffet’s (whom I think is living on his reputation for a while now, be careful of financial advisors who raffle off lunch with themselves for charity). But, honestly, every racetrack in the country has touts giving the same advice on how to play the ponies.

Andrew’s comments about Merck don’t really provide any insight on why there should be hope for a change anytime soon there. He talks of “promising” drugs acquired in the Schering-Plough acquisition and Merck’s “historically…productive labs”. Again, no new insights. Every stock prospectus ever issued (at least since the SEC’s been around) says that past performance is no guarantee of future performance. So, why should any of this make Merck a better investment. Then there’s the projection of a potential stock price in the mid-40’s from today’s 36 per share “if the pipeline pans out”. That’s a nice, safe, long term projection that is so far out that it should be perfectly safe to make. Also, it doesn’t do too much for an investor today.

Next up, my man Andrew tackles Sanofi. He gets it right about this being “underappreciated” but it’s where he goes from there that I disagree with. His faith in their drug pipeline seems to be based primarily on the CEO’s blandishments. Again, Andrew gets it right about the immediate challenges that this company faces but looking past 2013, he thinks things could be wonderful. Why? Because of their “vaccines and insulin products”. What type of margins will these products have? They sound like the type of products that national healthcare programs would pay for. The same programs that are playing hardball on pricing. I don’t know where Andrew plans on being a few years from now, but, I’ll wager it won’t be at Barron’s.

Pfizer and Novartis are the next drug stocks reviewed by Bary. He’s not as optimistic about the former, reality has to set in sometime, and with the latter, he gives a rosy forecast for 2015.

I’ll have more to blog about this article in my next blog. I find it rather disappointing that a major publication like Barron’s can expend as much printer’s ink as they did for this article and it doesn’t really add anything new to the debate.

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

A Shot Across the Bow

I don’t often get worked up over other writers’ work but a recent cover story by Andrew Bary in Barron’s about the rosy prospects for drug stocks set me off. (The article is available online only for subscribers, a short preview is available at http://online.barrons.com/article/SB50001424052970203296004575320891909686872.html . By the way, a subscription to Barron’s online edition is a very cost effective, environmentally friendly thing to do. Both Larry and I subscribe.) Here’s what got me going.

Andrew’s premise is that far from being dead, Big Pharma is on the cusp of a resurgence that could see some stocks rise by 30%. OK, now, those of you who have been faithfully following this blog know that I think anything but that about Big Pharma. The article was to me nothing more than a compilation of Big Pharma press releases. Sorry Andrew.

Let me explain why I feel this way. And, in fairness to Andrew, I’m not disputing his facts, I just see things differently, very differently.

First up, Andrew writes of the shift to vaccines and biologics. No argument there but will the profit margins be there? Also, given where healthcare reform is headed in this country and the budget shortfalls for many governments around the world (e.g., Greece, Ireland) how much money can actually be made here? Then there’s competition. What will happen when all the major pharmaceutical companies pile on? Profit margins will only get thinner. Biologics sound expensive and with their apparent manufacturing complexity can manufacturers really handle this and still make a profit?

Next, the writer quoting an analyst implies that drug stocks may be at their lows. I’ll admit that contrarianism would make the case that a buying opportunity may exist here but I don’t believe so. Contrarianism can’t trump fundamentals. (There’s a PhD dissertation in here somewhere.) And, the fundamentals aren’t good here.

Then, the dividend argument is played. (The older I get the more I can’t believe how these old bones keep getting gnawed.) Yes, dividend payouts are high for some of these companies. The argument is given that cash flows are strong. Yes, they are today but what about tomorrow when they dry up and cash balances are drawn down. Unless of course, some bright spark decides to borrow to continue paying those dividends. Shareholders of General Electric, and General Motors once used to look forward fondly to those quarterly dividend checks which don’t come anymore or are far smaller than they once were.

I’m not finished here. I’ll be back in the next several blogs to continue to dissect this article because I feel it needs to be put into perspective.

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

Europe – Big Pharma’s Next Big One?

Lately, Big Phama hasn’t had much in the way of good news. And, I’m afraid that this week’s blog won’t do anything to improve that impression.

The European Union’s (EU) recent problems with its Euro currency and fiscal problems in Greece and other smaller countries will only continue to put pressure on the profits of drug companies.

A recent article by Stephen G. Brozak and Lawrence F. Jindra, MD, How the Euro’s Woes Could Impact Health of Biotechnology, the Pharmaceutical Industry and the Average American, (http://wbbsec.com/index.php?option=com_content&view=article&id=140:how-the-euros-woes-could-impact-health-of-biotechnology-the-pharmaceutical-industry-and-the-average-american&catid=58:news-articles&Itemid=80 ) highlights the impact of foreign exchange losses on overseas revenues in addition to lower sales because of straining national healthcare systems. One point that I disagree with them about is when they say that life sciences companies will have to raise prices in the U.S. to offset foreign losses. I don’t think it will be that easy. First, American insurance companies and government providers won’t roll over and take price increases without a fight. Next, the U.S. consumer is still having a rough time. Household and disposable incomes are recovering (some economists would argue that they are in a cyclical downward trend with no end in sight) so those price increases may only drive more customers away.

I suspect that the various EU national healthcare systems will probably take advantage of their control over drug and other medical products to not only reject price increases but to roll prices back. At a minimum, they may just decide to restrict the quantities purchased. Even the Indian Ministry of Commerce is forecasting difficult times ahead for its country’s drug industry (http://pharmexcil.org/data/media_files/Indianpharmaexp_media_file_266.pdf ). Not a good outlook for the global healthcare industry.

Another interesting point from Brozak’s and Jindra’s article is that the number of small biotechnology companies, the engines of new drug development, have decreased from 400 in 2009 to 300 in 2010. They hint at the impact on future revenues when the pipeline is drying up.

Unfortunately, for a while now, I’ve been somewhat negative about prospects for the life science’s industry. We are continuing to see fundamental changes in this industry as it downsizes after at least a generation of outsized growth which wasn’t sustainable. I’ll continue to blog about what’s happening and where this all may be going.

Flashback: I just want to reference back to a prior week’s blog on Offshoring – Gone Too Far? Recently, MSNBC carried a story by Christopher Bodeen of the Associated Press (http://www.msnbc.msn.com/id/37624923/ns/business-world_business/ ) about ongoing labor unrest in China by workers seeking higher wages. Apparently, some are seeking pay increases up to 20%. Let’s see what that does to the offshoring trend! I’ll keep an eye on this developing story.

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

A Cautionary Tale

I’m going to run off the reservation a little today. (OK, maybe more than a little, but, I think the point is important.) The media has been full of stories for most of this year about several, large corporations (e.g., Toyota, BP, Massey) that have gotten themselves into a lot of trouble. (Check out Matt Krantz’s USA Today June 4, 2010 article, http://www.usatoday.com/money/markets/2010-06-04-disasterstocks04_ST_N.htm .) Now, you’re probably wondering why I’m blogging about these companies and what’s the relationship with Big Pharma?

The connection is cost cutting. Relentless cost cutting to the exclusion of all else. I’m not implying that these companies are alone in this. The mantra of cost cutting to enhance shareholder value has been around for at least a generation. It sounds seductively simple, unnecessary costs should be eliminated. The good costs are those that enhance productivity and everyone goes home happy. Right?

Here’s where I’ve always had a problem with this rather simplistic view of things. What’s a good cost? The financial analysts and media tend to look at earnings per share (EPS) and year over year profits. The fact that routine maintenance costs, expert staff, and training costs for the remaining employees have been reduced, if not outright eliminated, seems to be glossed over. And, let’s not forget about research and development expenditures which might go a long way to explaining the drying up of the product pipelines at drug companies lately.

Corporations have been becoming increasingly complex for a long time. Managing complexity as many of our readers know from firsthand experience is no simple matter. So, how can a simple measure like how much less have we spent than last year be used while the business is not exactly simplifying?

Product recalls may prove to be leading indicators in the long run of underlying problems. Of course, that assumes the products are being recalled in the first place. Take a look over at the FDA’s website for drug recalls (http://www.fda.gov/safety/recalls/default.htm ) and ask yourself how can these things happen to companies like Pfizer?

Where I’m going with all this is what should we expect to see with Big Pharma and their smaller brethren? I’ve blogged before about how large life sciences companies are collections of products and services that are almost impossible for one executive to manage.

The argument of synergy is often trotted out, but, I have yet to see a consistent track record for that one. In fact, I can’t even think of a good stand alone example of one. (I invite the readership to post with any that they may be aware of.)

In closing, I believe that we are seeing the start of a new trend for business and especially in the life sciences sector and that is, large, complex businesses struggling to understand what expenditures are necessary and which aren’t. Since figuring this one out is tough, I expect that we’re going to see declining profits for some time.

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

Offshoring – Gone Too Far?

One question that Larry and I get all the time is when do we think the offshoring trend will reverse and all those jobs will start coming back home to the U.S.?

Well, we don’t have a date but we think we’re seeing some signs that we’re close to the high tide mark.

Earlier, we blogged that when the cost differential between manufacturing in this country versus overseas begins to narrow the offshoring incentive will begin to disappear. We may be getting close to this event.

Recently, the media have been full of stories about worker suicides at manufacturing facilities in China because of low wages and poor working conditions. In particular, Foxconn Technology, manufacturer of iPhones and iPads among many other globally recognized brands has been receiving a lot of attention. See Elaine Kurtenbach’s Associated Press article from MSNBC for a good write-up (http://www.msnbc.msn.com/id/37436341/ns/business-world_business/ ).

Even the Chinese Communist Party (CCP), never particularly worried about the status of its own downtrodden masses, seems to be concerned about the current state of affairs.

I’ve always been of the opinion that global offshoring and outsourcing has been based on a fallacy. That fallacy being that global companies could always find increasingly cheaper, educated pools of workers to happily provide world class products and services. The early adopters profited from this. Latecomers either had to pay more or move onto labor forces that were further removed both geographically and culturally from consumers.

I know of one global company whose outsourcing/offshoring teams are simultaneously chasing lower wage costs eastward across Europe and westward across Asia. They’ll probably collide somewhere in Kazakhstan sometime in the next few years. And then what? (Am I the only reminded of the “greater fool theory” from Wall Street?)

The game’s over folks or it soon will be!

I predict that the United States will begin to start bringing jobs back home. There will also be hiring to offset the additional job cutbacks in the pursuit of greater profits. China and other offshore destinations are not the only ones having to deal with a troubled work force. Eve Tahmincioglu, an MSNBC contributor, wrote an article this week concerning the rise in workplace suicides in the U.S. (http://www.msnbc.msn.com/id/37402529/ns/business-careers/ ). Economic problems are blamed. But, could what we’re seeing here in this country simply be the flip side of the coin that we’re seeing in China? What happens when American workers stop fretting about their economic situation, taking it out in themselves and decide to do something about it? Unions and confrontation with management have a long history in the U.S.. Maybe that 9.9% unemployment number may start to come down.

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

Medical Devices – Sideshow Marginalization?

One morning the other day, I was rushing to prepare to leave for work (Yes, I do have a real job.) when I stopped to check The Weather Channel (http://www.weather.com/ ). Impatiently waiting for commercials to go by, I suddenly saw Andrew Thicke of Growing Pains fame (http://www.imdb.com/name/nm0005484/ ) touting diabetes testers for CCS Medical (http://www.ccsmed.com/english/index.asp ). There was something about the commercial and Alan’s spiel that reminded me of other commercials highlighting powered wheelchairs (I still can’t get that tune out of my head.) and Lee Majors’ Bionic Hearing Aids (https://www.hearingaidtv.com/ ).

If you’ve been following my recent blogs concerning what’s been happening in the life sciences industry, in particular its slowing momentum, you’ve probably noticed that I believe the wheels are starting to come off the industry’s bus. Commercials like these, admittedly not from the industry leaders, highlight this trend for me.

The direct-to-consumer (DTC) advertising campaigns of recent years seem to a new phase or maybe it’s a new low. What started as Sixties-like art films morphed into light, romantic comedy skits with side effects voice over’s thrown is as an afterthought and, now, appear to be moving into a new phase more like the Home Shopping Network (http://www.hsn.com/ ).

For me, another sign of commoditization of an industry is mass marketing on the cheap. No disrespect to either Alan Thicke or Lee Majors, but I doubt that they are earning from these product endorsements what they used to in their salad days.

I also think that this is a sign of worse to come for television viewers. In a variation of Gresham’s Law, ‘Bad commercials drive out good.’ (If there was ever anything like a good commercial.) For those requiring proof just look at what reality TV has done to television.

Once upon a time, Stryker (SYK, http://www.stryker.com/en-us/index.htm ) had television commercials that were what one might call high brow. I wouldn’t call them exactly community service but you get the idea. I haven’t seen these for a while. Maybe they’ve been pulled or I’ve lowered the standards of my television watching. Something tells me that Stryker wasn’t getting the desired bang for their buck.

So where could this trend lead? Will we one day see a cable channel dedicated to pharmaceuticals and medical devices? Will we see the television favorites of years past hyping products? Would Sally Field suit up as the Flying Nun again? (http://www.webmd.com/osteoporosis/guide/sally-field-osteoporosis-story ) Lee Majors has great brand potential with the Bionic Man. Lindsay Wagner (http://www.imdb.com/name/nm0905993/ ) could even make a comeback!

OK, maybe I’m pushing the edge of the envelope here but you get the idea. Standards are continuing to drop in the life sciences area.

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

Big Pharma – Back to the Future

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

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

“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.