Layoffs in Big Pharma are happening Big Time! What does this mean for Portfolio Management?

Layoffs – They’re Happening!

The data is easy to find.  Fierce Pharma displays the top five layoffs by Pharma every year. 1  In 2009, Pfizer, Merck, Johnson & Johnson, Astra Zeneca, GlaxoSmithKline and Eli Lilly had the most layoffs, Table 1.

Table 1

(click on table to enlarge)

Table 1, Layoffs of the top five companies in 2007-2009 (Ref. 1).   The grey squares show the duration of restructurings for each company.  * Comparable to GSK total workforce at the beginning of 2009

Table 1 also shows the layoffs that occurred within those same five companies in 2007 and 2008.  The grey boxes show the period over which the reductions in force are anticipated.  Incredibly, the total announced layoffs for these companies from 2007-2009 equals nearly 100,000 people.  That’s equal to the total workforce report for GSK in 2009!  The impact would be the same as laying off the entire workforce of GSK, which was the third largest big pharma company in 2009!

What were the reasons given by these companies?  They attributed it to actual or anticipated decreases in earnings.  Pfizer and Merck also had to contend with their respective take-overs of Wyeth and Schering-Plough.  Sadly Wyeth and Schering-Plough had laid off a combined total of 13,900 employees in the year before they were taken over.

These are extremely significant numbers.  Headcount reductions constitute a force to be reckoned with.  It’s like big Pharma are trying to out do each other in lay-offs, like some sort of demolition derby!

Demoltion Derby

Of course, that is an over statement.  So let’s try to understand what is happening.

Where are we going? The Trend Towards Vertical Disintegration

What we’re left with, of course, is a reduced workforce that must take over the work of those that are no longer working in the company.   If we assume that both the staff that remains and the employees that were laid off were working hard before the layoffs, then the staff that remains must somehow work even harder.

Coincident with these layoffs is an activity that explains how the remaining staff has dealt with the loss of headcount – increased utilization of contract research organizations (CROs), collaborations with academia, small start-ups, and even with peer pharma, through what has come to be known as precompetitive research. 2  This externalization of effort has reached 50% of the R&D budget at GlaxoSmithKline  3, 4

If the GSK model is followed by all big pharma, we can expect a continuation of these dramatic layoffs well into the new decade.  We can also expect further externalization of R&D spend by big Pharma.  When the extent of externalization reaches 50%, it is safe to assume that all line departments are forced into a position of rationalizing the in-house need for every skill set within R&D.  Any competency that can be found outside the company by contract or collaboration will be removed from the company.

In GSK all of the units of research, now called Discovery Performance Units, are on three year performance plans and face elimination if they don’t achieve their goals.  The external part of R&D can achieve its goals through in-licensings and acquisitions of assets that may have taken many more years than three to develop.  It’s not impossible to imagine that in a three year time period the external part will outperform the remaining internal groups who must reorganize before they can work on their three year plan.  Thus in three years time, the externalization of R&D could go well beyond 50%.  In fact, Neuroscience Research was the first whole therapy area to go, as announced by GSK back in February. 5  GSK has also created a Discovery Performance Unit. 6 called the Virtual POC that conducts all Discovery and Development externally, a virtual DPU. 7

The R&D managers that oversee the process of externalization tend to view the process as “rebuilding for the future”, or reconstruction.  To staff who are suffering the traumas of being laid off or seeing coworkers depart it’s easy to view the process as demolition.

Demolition or Reconstruction

It is important, however, to refrain from characterizing the heads of big Pharma as uncaring.  It is a tough job, and they also know it must be done.  Moncef Slaoui has referred to this period of layoffs in GSK as “a period of adjustment – of grieving, if you will”…  “We know that we’re making changes that will make us stronger in four or five years. If we don’t make them now, we’re not going to be standing when it’s havoc in the industry. But it’s hard to relate that to an individual who may be losing his or her job today.” 8

If the R&D organizations of big Pharma were once seen as solid monolithic structures, clearly the trend is towards a structure that is not unlike the modern skyscraper, much lighter and flexible.

What the trend towards headcount reduction and concurrent externalization points toward has been referred to is the process of “Vertical Disintegration”.

What Happens in Vertical Disintegration (Externalization)

Vertical Integration is the process of performing all R&D, manufacturing and distribution within a particular company.  Vertical Disintegration is the move towards performing many to most of these processes in other companies. 9  Thus Vertical Disintegration is another way of describing externalization.  A number of industries have gone through the transformation – e.g. automobiles, aerospace, IT and the motion picture industry.  The Wikipedia notes that one major reason for vertical disintegration is to share risk with other companies (Note Andrew Witty’s comment, Ref. 3, about externalizing Discovery by 50% to share risk).

Dixon, Lawton and Machin argue that “insufficient overall investment is available today to support the growth of new vertically integrated companies from a research base, as occurred in past decades” and that “the process of creating and selling a drug can no longer be optimally accommodated within one vertically integrated business, and that vertical disintegration into ‘discovery’, ‘development’ and ‘marketing and sales’ businesses is needed. 10  Clearly the business factors that favored vertical integration are no longer operating in the bio/pharmaceutical industry.

Another issue with Vertical Integration comes with the need to invest in new technologies.  When a company desires to embrace a new technology it requires an investment in new equipment and staff.  The company may need to sell off equipment and let go of staff involved with old technology to afford the new technology.  If a particular technology is thriving in company A and company B can’t afford to invest in the technology to the extent of company A, company B would be better off partnering with company A rather than trying to duplicate the services of A within B.  In an era of booming technology, a company that partners with new technology firms may be able to harness more technology than a company that feels compelled to bring it in-house.

An argument for Integration is when processes are nonstandard.  The processes within Development tend towards standardization, especially those that must meet regulatory standards.  Thus externalization of Development has occurred more rapidly than in Discovery, because the processes in Discovery have been viewed as nonstandard.   But the discovery of clinical candidates is more like Boeing than Wright Brothers, especially in big Pharma which have been in the business of Drug Discovery for many decades.  The developments of high throughput chemistry and biology have tended to remove the scientist from actually performing many of the step-by-step processes of Discovery.  It has been argued that if screening is performed on chemical libraries that contain millions of “druggable molecules” the need for iterative lead optimization would be eliminated or at least dramatically shortened.  This robotization of the Discovery process means that it no longer requires the very large staff of chemists and biologists.  Any company can invest in the hardware and the chemical libraries (even those are for sale) and the few biologists and chemists that are needed more for results interpretation than for the physical labor at the bench.   Big Pharma Discovery is now exposed to externalization.

Internalization argues for a large internal budget, which is composed largely of fixed costs – laboratories, and staff.   Company loyalty was important with Internalization, since the staff was viewed as irreplaceable talent.  Staff that stays within a company for decades becomes more expensive as salaries increase, and as medical expenses increase.  Big Pharma have long been accustomed to these expenses.  The recent downturn in profitability 11 brings a challenge to the assumption that such costs are necessary.  Big Pharma Discovery must now argue for its existence as an internal competency.

Which Competencies Can be Externalized?

So let’s look at the competencies that are needed in the overall scheme of Drug Discovery and Development, and determine which competencies can be found through contract research organizations, or academic or small start-up collaborations.  Below is a list of those competencies which are available for partnering outside the parent corporation and therefore are not necessarily needed in the parent corporation.

  • Biology
  • Chemistry
  • Toxicology
  • Clinical Sciences
  • Statistics
  • Analytical Sciences

This list does not imply that all staff in these competencies are no longer required in Drug Discovery and Development.  Indeed, a certain amount of staff in these competencies may be needed to oversee the activities in the partnering organizations to ensure best practice.  Physicians in Development work with the on-site clinicians to ensure that all patients receive the same standard of care even in a mega-trial that occurs in many countries.   The line managers in each competency must determine the best mix of internal and external staff needed to accomplish the tasks of Discovery and Development. 12  These are the competencies that are not part of the GSK virtual CEDD. (Ref. 7)

Now let’s look at the competencies that will continue to be needed in the overall scheme of Drug Discovery and Development.

  • Operations
  • Finance
  • Marketing
  • Legal
  • Project Management
  • Portfolio Management

These are competencies which support corporate strategy, and therefore cannot be positioned outside the company in contract research organizations, or academic or small start-up collaborations.  Harpum recently showed that Industries, such as major construction, that have moved into Vertical Disintegration retain these competencies. 13

What may be surprising to some is the inclusion of Project and Portfolio Management in this list of core competencies.

What Vertical Disintegration in Big Pharma Means for Project & Portfolio Management

There is great news for project managers and portfolio managers!  The work of Discovery and Development, as big Pharma move towards Vertical Disintegration, will continue to be organized around the project concept.   Project leaders will continue to be best able to run projects.  In companies where the number of projects exceeds senior managers’ ability to keep track of the portfolio, the need for portfolio managers will continue.   One could imagine a future where line managers may be unnecessary.  The role of ensuring line best practice could be built into project plans by ensuring that quality standards are more overtly stated.

What Project & Portfolio Managers Can Do About Vertical Disintegration in Big Pharma

Those in Project & Portfolio Management are in a good position for the future.  But, to maximize one’s potential success in the future one needs to move to a position of being at the top of one’s game.  Now is the time to invest in the future, to improve one’s skill set as a project or portfolio manager.

The reader may wish to consider the white papers listed in our Downloads section of www.jamessamanenconsulting.com, that address best practice in portfolio management.    Cambridge Healthtech Institute recently contracted James Samanen to conduct a series of webinars, “Project and Portfolio Management for Drug Discovery Professionals”.  Details will be announced in the Meetings section.   If you have particular training or mentoring needs please contact us.

and related articles for 2007 and 2008 and related articles for 2007 and 2008

  1. “Top Layoffs in 2009″, Fierce Pharma http://www.fiercepharma.com/special-reports/top-10-layoffs-2009 , and related articles for 2007 and 2008.
  2. Precompetitive research may be defined as the non-competitive, cooperative research which leads the way to competitive development in the future by addressing key requirements of a new technology.  An example is the recent agreement between Lilly, Merck, Pfizer to share Genomics data on lung and gastric cancers in Asia.   Feb. 24, 2010, http://www.genomeweb.com/dxpgx/lilly-merck-pfizer-agree-share-pre-competitive-genomics-data-lung-gastric-cancer
  3. Yvonne Greenstreet, The Scientist Volume 23 | Issue 5 | Page 28-36, 2009
  4. “Externalising R&D enables GSK to capture scientific diversity and balance expenditure and risk in drug development. In the future, we believe that up to 50% of GSK’s drug discovery could be sourced from outside the company,” GSK Sets Out New Strategic Priorities, Andrew Witty, July 23, 1008, investor presentation, http://www.drugs.com/news/gsk-sets-out-new-strategic-priorities-8477.html
  5. http://pharmapieces.blogspot.com/2010/02/gsk-cuts-neuroscience-outlines-strategy.html
  6. Discovery Performance Units were set up by GSK in 2008 – each akin to a therapy area
  7. http://invivoblog.blogspot.com/2009/10/gsk-in-tune-with-lillys-chorus-on-cheap.html
  8. “When Pretty Good Isn’t Good Enough”, Interview with Moncef  Slaoui, NGP, issue 14, http://www.ngpharma.com/article/When-Pretty-Good-Isnt-Good-Enough/
  9. http://en.wikipedia.org/wiki/Vertical_disintegration
  10. J. Dixon, G. Lawton and P. Machin, Nature Rev. Drug Disc. 8, 435, 2009
  11. Only 0.7 % Profit Growth in 2009 over the previous year, compared to 10.4% in 2008, 15.9% in 2007, 8.1% in 2006&2005 – among Fortune 500 companies, http://money.cnn.com/magazines/fortune/global500/2009/performers/industries/fastgrowers/profit1yr.html
  12. An open question is whether the “external” industry has the capacity to absorb all of the talent that is being shed, especially in the current economy that suffers from reduced investment capacity.
  13. Pete Harpum, “Project Management is the Core Competence Required to Deliver Drugs to Market – Lessons from Construction,” PMI Pharma SIG Annual Meeting, Philadelphia, March 16, 2010

 

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