Are Pharma’s ‘Good Old Days’ Gone Forever?

Patent losses, tougher FDA standards, and slew of smaller, nimbler rivals have reshaped the industry

   

Are Pharma’s ‘Good Old Days’ Gone Forever?

While employed in the pharmaceutical industry during its salad days, this reporter was frequently besieged by friends who asked for help in getting their adult children jobs, usually as drug sales representatives. I couldn’t blame them. After all, the industry was one of the best places to be: Profits were high, and the pipelines were yielding a plethora of drugs that were effective against heretofore untreatable diseases.

Working for a drugmaker in the 1980s was an “ideal career,” wrote two members of RegentAtlantic Capital in 2008: “Pharmaceutical companies and their employees had a paternalistic relationship. Pay was good, and employees’ retirements were secure, with robust pensions. Jobs were stable and benefits unbeatable.” And thanks to stock options, many of these employees who stuck with their companies became millionaires.

Things are much different today. Plagued by patent losses, exploding R&D costs and global competition, drugmakers are shedding jobs in record numbers. Since 2000, the industry has shrunk by 300,000 employees — approximately the population of Cincinnati — according to Forbes, citing a study by consulting firm Challenger, Gray & Christmas. Sales reps have been hit hard, with 33,000 in the U.S. laid off since 2005, according to The Wall Street Journal.

These cuts trimmed the sales-rep universe by about a third.

Obviously, it’s not only sales jobs that are being slashed. Thousands of scientists involved in drug discovery have been sacked as the end of the blockbuster-drug era has ushered in a new period of cost-cutting, according to Epoch Times.

And the cuts don’t appear to have stopped. Last week, Swiss drug giant Novartis (NYSE:NVS) said it plans to ax 2,000 more of its workers during the second quarter of 2012.

“The good old days of the pharmaceutical industry are gone forever,” according to a December McKinsey Quarterly report, a business journal published by consultants McKinsey & Company.

“Even an improved global economic climate is unlikely to halt efforts by the developed world’s governments to contain spending on drugs,” the report added.

With all the employee cutbacks, conventional wisdom would figure that the number of drug companies is shrinking, too. But just the opposite is happening. The industry is actually growing in numbers, but splintering into different segments.

Besides Big Pharma, the industry now includes generic, biotech, life-sciences, health-care equipment, and midsize pharma companies, noted the McKinsey report. In fact, the industry has grown from 84 companies in 1989 to nearly 200 today, with midsize pharma and health-care equipment now comprising the majority. So while thousands have lost their jobs with the big names such as Merck (NYSE:MRK), Pfizer (NYSE:PFE) and Abbott (NYSE:ABT), many have undoubtedly found new jobs at smaller firms.

Clearly, tougher times are ahead for the pharmaceutical industry. Profit margins are shrinking. Governments are setting the bar higher for approval of new drugs, requiring companies to show that their treatments actually work. And generic versions of formerly high-priced blockbusters are flooding the market. Pharma giants are buying up smaller drugmakers in an attempt to stay ahead.

In a follow-up article, we’ll take a look at where the best opportunities might be for health-care investors.

As of this writing, the author is long Novartis, Merck and Pfizer.


Article printed from InvestorPlace Media, http://investorplace.com/2012/01/are-pharmas-good-old-days-gone-forever/.

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