Drug firms set to emulate Pfizer's dose of cost-cutting

After the heady mergers and acquisitions in the pharmaceuticals sector in the 1990s, the latest round of cost cutting announced this week by Pfizer shows bigger is not necessarily better.

In a fresh effort set to strip out up to $1 billion (€767 million) in additional annual costs, Jeffrey Kindler, the new chief executive, is gearing up to cut another 7,800 jobs worldwide - on top of a 2,200 reduction in its US sales force unveiled just a few weeks ago. The impact on the group's Irish operations - which employ 2,000 - may be relatively light, although its Cork manufacturing plant remains under review.

Coupled with other announcements in the past few months, that adds up to a planned 10 per cent reduction of the 100,000 workforce, and annual gross cost savings of up to $5 billion by the end of next year.

As Ian Read, president of worldwide pharmaceutical operations, put it in his presentation to analysts on Monday, the aim is to reduce the cost base with a "return to pre-Pharmacia headcount" - a reference to Pfizer's merger with its Swedish rival in 2003.

"This news from Pfizer means the attraction of mergers and acquisitions looks to have come horribly unstuck," says one pharmaceuticals analyst, arguing that other companies may follow suit.

Until recently, merger mania drove companies together, in the hope that critical mass would boost innovation. But intensifying pressures - driven by competition and a dearth of product launches to replace medicines coming off patent - are forcing the industry to seek ever-larger savings. One area long emphasised by generic drug producers is in more efficient manufacturing. For Pfizer alone, 1,100 jobs are set to go in this division, with a planned halving of the number of factories it had in 2003.

A second focus for cost-cutting is research and development,with 2,900 jobs likely to be affected through site closures - although the company stresses that most jobs will be saved and its overall innovation budget will remain unchanged at about $7.5 billion a year.

That leaves the largest economies to come from the company's sales, marketing and administrative headcount - an area that Pfizer's peers are also eyeing closely and some may emulate.

A survey of pharmaceuticals executives last year by Roland Berger, the strategy consultants, suggested that two-thirds expected the number of sales representatives in Europe to fall significantly over the next two years after rising sharply from 60,000 in 2000 to 100,000 in 2005.

Analysts yesterday suggested that Sanofi-aventis, BMS, Eli Lilly and Merck - many of which have operations in Ireland - could be among those that follow Pfizer's lead with a new round of cuts. But other players - such as Novartis and Novo Nordisk - have instead been strengthening their sales forces.

"It's not simply about cutting but right-sizing sales forces with a lot of re-skilling and redeployment," says Nev Skelton, head of sales force effectiveness at IMS, the health consultancy. He stresses that changes will depend on the product mix at each company.

The general trend is towards smaller, higher-paid, more-qualified sales reps marketing speciality drugs such as cancer treatments to specialist doctors.

But each company's pipeline is different - and he predicts an industry-wide shift from specialist to primary care products in five years' time.

In the meantime, while cost-cutting can deliver short-term savings, it is less clear where the long-term innovation will come from. As one industry observer cautioned yesterday: "It's hard to tell at what point you stop cutting the fat and start cutting the meat."