Andrew Tolve reports on what the spate of recent job cut announcements says about the state of big pharma.

It’s been a busy time on the pharma chopping block. First, AstraZeneca announced plans to lay off 8,000 workers by 2014, adding to the 12,600 jobs the company has slashed since 2007. Now GlaxoSmithKline is expected to announce 4,000 additional job cuts of its own, following 2,000 cuts in 2009. Add to that suspicions that Pfizer and Merck may be about to take similar actions, and the news that UCB will officially exit the U.S. primary care market this month, and it sounds a lot like doom and gloom for big pharma.

Tyrone Edwards, professor of business administration at Cheyney University of Pennsylvania and former senior vice president of sales and commercial operations at Merck & Co, cautions against such hyperbole: These job cuts “support the notion that we’re trying to get away from transactional selling in the pharmaceutical industry to more value-oriented or solution-oriented selling. I think it puts a healthy pressure on the pharmaceutical industry to come up with a new and better way of engaging the physician.”

Downsizing or right-sizing?

According to Edwards, these current job cuts are part of a larger trend. The pharmaceutical industry hit its employment zenith in 2004/2005, with roughly 105,000 sales people employed in the US. Despite their formidable size, however, big pharma companies found themselves with fewer big blockbuster products in their pipelines and their existing mega-brands on the verge of going off—or already off—patent.

Additionally, says Edwards, the industry was starting to catch wind of the fact that physicians didn’t want to be contacted by dozens of different reps toting the same products. “So pharmaceutical companies were finding it harder and harder to justify maintaining the armies of representatives,” says Edwards.

“Glaxo and AZ are not alone,” Edwards continues. “All of the big pharmas have been doing this. Pfizer has been doing it. Merck has been doing it. So this new round of job cuts is not surprising. Some speculation is that the industry needs to be down in the 65 to 70 thousand total rep number, so you’re looking at from its height a reduction of about 30 to 40 percent capacity that has to come out.”

Too big to succeed?

Edwards says it’s a similar story in R&D, where there is not a sufficient number of products in the pipeline to justify the headcount. “It’s not that different from the sales representatives,” Edwards says. “When you find you have too much capacity, you have to trim back on the number of people.”

“This is going to continue,” agrees Charlotte Sibley, senior vice president, business management for Shire Pharmaceuticals. “All of these companies are too big. They’re going to have to get smarter and faster and better at R&D. Suddenly, there’s a pipeline gulf and yet they’ve still got all this infrastructure, which is one of the reasons they’re getting rid of people and making investments in smaller biotech companies, where presumably they’ll find the next round of products.”

The pharmerging markets

Another strategy behind the current job cuts, she says, is reorientation toward emerging markets, where big pharma sees huge potential. “If they’re not replacing the jobs, they’re certainly looking to make investments or co-development,” she says. “And certainly some of their advertising development resources, and presumably people, too, are being redirected toward China, Korea, Turkey, any of those.”

For more on pharma and emerging markets, see How to Get Ahead in 'Pharmerging' Markets and Cracking the Chinese pharma market.

Edwards agrees. He says that pharmaceutical companies are using lean processes, like lean six sigma, to strip out growth in expenses on both the R&D and the sales front. However, once they’ve completed exercises to reduce waste, the next step is reallocation exercises that look at markets around the world and place them in one of three strategic buckets: high-profit but mature; high-profit and fast-growing (or emerging); and high-potential-profit but fast-growing.

“So the question is how to reallocate your resources across those three buckets,” Edwards says. “Because there are very different returns on those three buckets of opportunity. Every company is looking at that, and the pharmaceutical industry is no different.”

No end in sight

Edwards says it’s hard to offer a timeline for when the current job cuts will end. Both he and Sibley agree that they are independent of the recession; the layoffs began before the recession and very well may continue after it.

What is for sure is that big pharma has reached a critical juncture, they say, with mega-brands coming off patent, not enough mega-launches in the pipeline to replace the lost revenue, diminishing access, and faster generic uptake.

And the question of when firms will regain optimal profitability, says Edwards, depends on two things: how quickly they can come up with alternative sales models to the ‘boots on the ground’ model, and how quickly they can assemble a portfolio of products that are highly profitable to replace profits lost to generics.

“Without a good handle on those two unknowns, it’s hard to tell when it’s going to end,” says Edwards. “I think different companies within the industry are at different stages, depending on their pipeline and how they’ve been experimenting with their new commercial models. But the industry itself, I don’t think it’s over in the next year or two. I think it’s definitely going to continue for the next 18 to 36 months.”

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