Drug manufacturers hurting
By Linda A. Johnson
By Linda A. Johnson
TRENTON, N.J. — Merck & Co.'s announcement this week that it is slashing its workforce by 11 percent and shuttering several plants is as much a reflection of pharmaceutical industry belt-tightening as of Merck's financial and Vioxx-related legal woes.
The reasons are many: increased generic competition, pressures from health insurers to lower prices, rising drug development and marketing costs, fewer new blockbuster medicines, and worries about possible governmental price controls.
The upshot is that doubledigit profit increases, routine for drug companies through most of the 1990s, now look to be history. It's also why drugmakers feel a sense of urgency to focus on leaner, faster production and other ways to hold down costs just as the airlines and automakers have been doing, experts say.
Drugmakers "didn't have to worry about efficiency" before because they could demand virtually whatever price they wanted for products, said Albert Rauch, pharmaceuticals analyst at A.G. Edwards & Sons Inc. in St. Louis. "They just sort of got a little fat."
And extraordinarily profitable. The five largest U.S. drug companies — Pfizer Inc., Johnson & Johnson, Merck, Bristol-Myers Squibb Co. and Wyeth — earned $29.5 billion in 2004 on sales of $160 billion.
Gross profit margins — revenues minus the cost of producing goods — also are still in the range of 70 percent to 80 percent, many times the 10 percent margins in some other industries.
Job cuts are one way of keeping margins high, and they are up 150 percent from the first 11 months of last year. That amounts to almost 25,000 cuts so far for the industry in 2005, according to John Challenger, CEO of outplacement firm Challenger, Gray & Christmas, who predicted "we're going to continue to see increasing layoffs."
Generic drugs, which now account for 53 percent of U.S. prescriptions, contribute to these pressures.
Next year, drugs with $28 billion in annual sales lose patent protection, according to health information company IMS Health. Those include Merck's Zocor and Bristol-Myers Squibb's Pravachol, both for high cholesterol, plus Pfizer's Zoloft and GlaxoSmithKline's Wellbutrin, both for depression.
Brand-name drugmakers also must offer rebates and discounts to get on managed-care companies' lists of preferred drugs, a key factor, according to Tony Butler, pharmaceuticals analyst at Lehman Brothers.
Another problem is shrinking pipelines of new drugs.
"For at least 10 years, some of the brand companies were expending a lot of their effort and a lot of their time extending their monopolies instead of using their resources for innovation," focusing on legal loopholes and minor improvements in drugs that could extend their patents, said Kathleen Jaeger, chief executive of the Generic Pharmaceutical Association.
Rauch said it's also getting harder to find drugs that are better and safer than existing ones.
He said that drug companies "have become the next big target for lawyers," after the asbestos and tobacco industries, and that their legal costs are mounting.